The Federal Open Market Committee (FOMC) meets this week, and top Fed watchers are banking on more easing. They include Goldman Sachs’ Jan Hatzius, Morgan Stanley’s Vincent Reinhart, Bank of America’s Michelle Meyer, and SocGen’s Micala Marcussen. Bank of America’s Michelle Meyer sees QE coming, but not this week.Michael Feroli, JP Morgan’s Chief U.S. Economist is chiming in. “We see two actions as most likely next week: a change in communications to push back guidance of the path of the fed funds rate, and an extension of Operation Twist. We think there is about a three-in-four chance of the FOMC agreeing to each of these actions,” he wrote in a note on Friday.
He points to the three conditions recently laid out by Fed Vice Chair Janet Yellen: 1) growth slows so that there’s little improvement in unemployment, 2) downside risks to growth intensify, and 3) inflation heads below 2 per cent.
Feroli points to the recent string of disappointing U.S. economic data and the deterioration in the eurozone debt crisis.
“Looking at the first two conditions together, we see a case for further action at next week’s Fed meeting,” wrote Feroli. “Moreover, the market’s reading of the Fed reaction function has apparently come to a similar conclusion. Were the Fed to judge this a misperception of its reaction function, then in doing nothing it would need to be comfortable adding a tightening of financial conditions to the list of downside growth risks.”