Today, at 2:15 PM ET, the Federal Open Market Committee releases its latest decision on monetary policy.The release of the FOMC’s December meeting minutes in early January surprised observers by revealing that several members of the Committee thought winding down the Federal Reserve’s quantitative easing program by the end of 2013 would be appropriate.
That has added some fuel to the rise in Treasury yields that began in December, and this week, 10-year yields broke above 2 per cent for the first time since April.
In the trenches, market participants are noticing a change in January. On Friday, bonds staged their biggest sell-off since the beginning of the month. It was as if no one wanted to be long over the weekend. In a note, Brean Capital Head of Rates Russ Certo wrote, “I haven’t seen too many days in the bond market recently like Friday, where the market was continuously under pressure, with seemingly paper coming out of the woodwork on any mere flirt of a tick up.”
Certo contrasted that sort of environment with a typical Friday in 2012, when, due to a lack of anything interesting going on, traders would phone it in and try to cut out early if they could. “Not so, now,” says Certo. “I anticipate 2013 will be far more exciting than 2012 and in some ways, already has.”
The bond market is thus clearly on edge – murmurs of a 1994-style replay have surfaced, for example – and in that context, the FOMC release could be important.
The reason: although the Fed has offered explicit guidance on unemployment and inflation thresholds that must be met before it will consider raising interest rates, it has not offered guidance on when it will halt the bond purchases that constitute its quantitative easing policy – which is what everyone is worried about since the release of the December FOMC minutes.
Goldman Sachs Chief Economist Jan Hatzius says the FOMC may have discussed “QE thresholds” at this week’s policy meeting. In a note to clients Friday, he wrote, “Any move to QE thresholds would probably not occur until the spring or summer of 2013. But the future of QE, the criteria for slowing or ending it, and perhaps even the question of whether QE thresholds are desirable in principle are likely to be on the FOMC’s agenda as soon as next week.”
Deutsche Bank Chief Economist Peter Hooper agrees. In a note, he writes, “For now, the Committee appears to be content to keep current downward pressure on market rates in place via its QE at the current pace of $85 bn per month with no indication of an end in sight. However, in its discussions today and tomorrow, it will have to wrestle with an important element of communications regarding this issue: namely, how to convey to the market just how much weight it places on the costs of further balance sheet expansion. How it chooses to do so will have important market implications.”
As for consensus estimates, below are key points from Bloomberg’s survey of market economists:
- 32 per cent of respondents expect the Fed to end QE in Q4 2013, while 30 per cent expect it to end in Q1 2014
- The average estimate of total bond buys under the current QE program is $713 billion in mortgage-backed securities and $793 billion in Treasuries
- 57 per cent of respondents don’t believe QE will boost payrolls in 2013, but the 47 per cent who do believe QE will create jobs expect on average a benefit of 342,000 payrolls added
- 63 per cent of respondents expect a substantial improvement in the labour market to be the key factor in ending QE, while the balance expect either rising inflation, fears of financial instability, diminishing returns, or other factors to bring bond buys to a halt
- 40 per cent of respondents say U.S. monetary policy is “somewhat too easy” while 30 per cent say it’s “just right”
We will have the full statement at 2:15 PM ET. Follow the release LIVE on Business Insider >
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