Photo: Wikimedia Commons
All eyes are on the Federal Open Market Committee meeting, where the Federal Reserve will announce its new policy rate decision and could make good on rumours about “Operation Twist” and other forms of monetary easing.The meeting will start on Tuesday, September 20, and continue through the next day, when a policy decision will be announced at 2:15 PM ET.
In a proposed Operation Twist, the Fed would purchase 7-10 year notes (and maybe even longer-term bonds) by selling short-term securities in the hopes that this would drag down long-term interest rates.
Discussion of this plan belies deep fears about the sluggishness in the housing sector. From Fed Chairman Ben Bernanke earlier this month:
The housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time–with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines–the rate of new home construction has remained at less than one-third of its pre-crisis peak.
While consensus is for implementation of some form of Twist program, some analysts remain sceptical that this plan would work and the outcome for the financial services industry looks mixed. Some are calling instead for a new round of traditional QE–the kind that would expand the balance sheet–to jumpstart sluggish economic growth.
Either way, attention remains focused on Europe. Fed Chairman Ben Bernanke warned in his statement last month that political inefficiency in the U.S. could hinder market growth, but the focus of both FOMC and investor anxiety has centered around fears of a global economic slowdown.
That was evident in the FOMC minutes released after last month’s meeting:
Many participants also saw an increase in the downside risks to economic growth. While participants did not anticipate a downturn in economic activity, several noted that, with the recovery still somewhat tentative, the economy was vulnerable to adverse shocks. Potential shocks included the possibility of a more protracted period of weakness in household financial conditions, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in Europe were to deteriorate.
Here are a smattering of investor opinions on what will happen next Tuesday:
From Deutsche Bank:
We believe the Fed wants to look as proactive as possible in trying to get the economy to improve. Most policymakers on the Committee are of a dovish inclination, and they believe that substantial economic slack will limit any sustained rise in core inflation. We sense that the consensus believes further accommodation poses little near-term risk to the economy. Consequently, the FOMC will continue to err on the side of doing more not less. As a result, we would not be surprised to see continued vigorous dissension from the hawkish Committee members.
From Morgan Stanley:
Double-dips have only occurred upon Fed tightening: Whenever in post-war US history expansions have died young, the catalyst has been monetary policy tightening. Put differently: double-dips have occurred only when induced by the Fed…In the US, the Fed will not only remain supportive but is expected to loosen monetary policy further.
We think the market will be disappointed by relative inaction. Given that the Fed acted through communication strategy in August (the last FOMC meeting) and that the Obama jobs plan is still being discussed, we see no reason for the Fed to feel compelled to act. We would expect risk assets to sell off in that scenario as well, as they have bounced off recent lows, despite the eurozone turmoil.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.