The Federal Reserve’s Federal Open Market Committee concludes a two day meeting. Here’s what’s happening:
- FOMC releases a monetary policy decision at 12:30 PM ET (analysts predict it will hold its federal funds target steady at 0.25 per cent).
- The Fed publishes committee members’ economic and monetary policy projections at 2:00 PM ET (mixed expectations).
- Lastly, Chairman Ben Bernanke gives a press conference at 2:15 PM ET on the Fed’s monetary policy and economic outlook (no more quantitative easing is likely to be announced…yet).
Of particular interest are Fed members’ projections about when future rate cuts will be necessary. Last time the committee published projections in January, a majority of committee members agreed that policy firming should happen in 2014, but positive economic data in the last few months and the threat of rising gas prices may have altered these projections.
This was the chart published back in January:
Photo: Federal Reserve
A near-term revision to policy firming would be resoundingly negative for markets in the long term. While near-term revisions to policy firming would suggest fundamental strength in the U.S. economy, boosting interest rates sooner rather than later would force investors to reconsider the role of the Fed in spurring on the economy. If the recovery falters, then the Fed might be slower to step in.
Further, it suggests that there will not be another round of quantitative easing in the next few months, something investors are hopeful FOMC members will embrace by June, in order to sustain economic growth after the expiration of Operation Twist. Investors expect the Fed to act soon or not at all on this count, since the Fed will not want to call attention to itself in the run-up to November’s presidential elections.
Then again, if committee members think that Fed members are revising their projections for policy firming farther into the future, that would be instantly positive for stocks and indicate that QE soon is a real possibility, although it would also suggest some lingering fundamental weaknesses in the U.S. economy.
Investors are divided on whether or not FOMC members will actually revise expectations for policy firming earlier. Deutsche Bank U.S. economists opined “that there could be a modest shift toward an earlier tightening.” At the same time, Morgan Stanley’s David Greenlaw wrote in a note this morning that projections would probably look more like this:
Photo: Morgan Stanley
Today’s other big story…WAKE UP! It’s Absurd To Say That Austerity In Europe Is Coming To An End >
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