After a big sell-off in the bond market following the last time Federal Reserve Chairman Ben Bernanke made a public appearance (at his testimony before the Joint Economic Committee of Congress on May 22), most expect today’s FOMC monetary policy statement to strike a dovish tone and attempt to pare back some of the volatility that has appeared in financial markets.
The big concern, of course, is that the Federal Reserve will begin tapering back the pace of bond purchases it makes under its quantitative easing program of monetary stimulus sooner than the market was pricing in – maybe even as soon as September.
Société Générale interest rate strategists Ciaran O’Hagan and Vincent Chaigneau think the Fed has something very different in mind for today.
In a note to clients, they write:
We expect the Fed will choose to provide more helpful guidance on tapering and eventual exit steps. Our baseline scenario is that the Fed will begin tapering asset purchases in September. This guidance will likely come primarily during the press conference, though a slight nod to its initiation within a few meetings could appear in the FOMC statement.
Volatility over the past few days – with substantial re-pricings on every recycled press article of Fed musings – seems to indicate that the market has not eased into a consensus ahead of the FOMC. If, as we expect, the Fed does provide additional guidance around tapering and does not remove the ‘few meetings’ construct established in Bernanke’s JEC testimony Q&A – it could catch some market participants flat-footed. The bias for an FOMC response is towards a stronger sell-off – the stronger the guidance, the stronger the sell-off.
That’s markedly different from what most expect – perhaps some tweaking of the language in the FOMC statement and overtures from Bernanke during the presser to dissuade volatility.
If O’Hagan and Chaigneau are right, markets may be in for a bit of a surprise today.
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