On Wednesday we get the latest policy announcement out of the Federal Reserve.
Unlike some recent meetings, this is going to be a pretty important meeting. That’s for two reasons: One is that interest rates are on the rise. The other is that people are really talking about the Fed slowing down on its extraordinary measures to stimulate the economy (“the taper” in popular parlance).
Fortunately, Jon Hilsenrath of the WSJ has provided a blueprint for what to look for at Wednesday’s meeting.
Contrary to what you might expect, the most important part of the meeting is not going to be Bernanke’s press conference on Wednesday after the announcement.
Instead, says Hilsenrath, the key thing to watch is the Fed’s forecast of the path of the economy.
At the conclusion of its two-day policy meeting on Wednesday, the Fed will release its updated projections of growth, inflation and unemployment.
The evolution of these forecasts is a critical issue. Fed officials are unlikely at this meeting to change their $85-billion-per-month bond-buying program—launched to boost growth by pushing down long-term interest rates and pushing up asset prices, and spurring spending, hiring and investment.
But what they say about the economy will send important signals about what they expect to do in the future. If they maintain confidence in their economic forecasts, it could signal they think they’re on track to begin pulling back the program later this year.
Mike O’Rourke of JonesTrading explains why Hilsenrath is likely spot on in his assessment:
We think this article is extremely important and provides a clear path to the correct interpretation of the FOMC’s view. The key takeaway will be to focus on whether the Fed maintains the forecast released in the March Summary of Economic Projections (SEP) when the June SEP is released. The reason that we have a high degree of confidence in the Hilsenrath article is that nearly identical sentiments were expressed by another important Fed watcher, Greg Ip of The Economist in a CNBC interview. Many will remember that Ip was Hilsenrath’s predecessor as the Fed watcher at the WSJ.
The title of the Hilsenrath article puts the focus on the Fed’s latest growth view. The basic view Hilsenrath expressed is that “Fed officials are unlikely at this meeting to change their $85-billion-per-month bond-buying program—launched to boost growth by pushing down long-term interest rates and pushing up asset prices, and spurring spending, hiring and investment.” The basic view Greg Ip proffered on Friday was that “If the Economy continues to perform reasonably well, then they could start to step down the pace of Quantitative easing in the next few meetings. What he will not tell us, is which meeting or by how much.”
All that being said, the language Bernanke uses in his post-meeting press conference will be interesting.
George Goncalves, interest rate strategist at Nomura, thinks Bernanke will use this opportunity to clarify some communication hiccups that the Fed has been having:
Thus the key event this week is the June FOMC meeting. If they strike the right tone, in our opinion, that should help keep the bullish price-action intact. We believe a Bernanke led FOMC will take this opportunity to make a clear distinction between tapering QE programs versus its commitment to keep Fed Funds rate “lower for longer”. A combination of Bernanke‟s Q&A, an updated SEP forecast (where fed hike expectations can shift to out years) and a clear statement that codifies policy differences while flagging concerns over inflation would set the record straight.
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