From Nomura on this week’s Fed meeting:
We think it is more likely than not that the FOMC will give more guidance on the federal fund rates remaining low “at least through mid-2013.” We expect an addition of unemployment rate and inflation language instead of vague “resource utilization.” We do not anticipate a specific numerical target because, as it was pointed out in the minutes to the August meeting, members questioned “how an appropriate numerical value might be chosen.”
We do not expect a reduction in interest rates on excess reserves (IOER) to be announced. In our view, reducing the IOER would provide little to no easing, and moreover might risk disrupting the smooth functioning of money markets. We do not believe the setting is right for further expansion of the balance sheet, so-called “QE3.” Many FOMC participants, especially vocal hawkish members, are in information-gathering mode. Still others are interested in waiting for the final outcome of the US jobs act and the counter-measures against the European sovereign crisis.
Lengthening of the average maturity structure of the Fed’s holdings of Treasuries. According to the minutes of the 9 August meeting, “most” FOMC members judged that further accommodation could be helpful in promoting a stronger economy. The FOMC has an easing bias, i.e. is inclined to do something more. On policy measures related to the size and composition of the Fed’s securities holdings, the August minutes revealed “some” saw additional purchases as a means of lowering longer term interest rates while “others” suggested the Fed could affect changes in long-term rates by shifting the average maturity of its portfolio. Obviously hawkish members will likely resist any idea accompanying an expansion of the Fed’s balance sheet.
We expect two dissents. Minneapolis Fed President Naryana Kocherlakota expressed that he would not dissent again for the language change made at the last meeting. We think Philadelphia Fed President Plosser and Dallas Fed President Fisher will oppose the decision to increase the average maturity of the portfolio and will dissent again at the September meeting. We suspect Kocherlakota has a higher threshold for dissent.
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