Fireworks Will Probably Wait Till November – FOMC Preview

The Federal Open Market Committee (FOMC) is likely to repeat its previous statement and not provide any exciting news, as it did last time. Nevertheless, choppy trading will follow this release. FOMC Preview.

Last month’s dramatic decision

The previous FOMC meeting provided lots of action. The committee, lead by Ben Bernanke, decided to renew the Quantitative Easing steps. Up to this meeting, bonds that matured were absorbed by the central bank – the balance sheet squeezed. From that meeting onwards, the Federal Reserve would reuse the mone and buy government bonds.

The initial reaction was a weaker dollar, as printing more dollars meant less value. But after many hours, the trend changed – the notion that the economic situation in the US is dire sent traders to buy the dollar – risk aversive trading. The statement included a clause about the economic recovery being more modest than expected.

Pause in drama

This FOMC meeting will probably be far less dramatic than the previous one – no significant changes in policy are due.

Ben Bernanke is likely to continue the pledge to support the economic recovery continuing the bond buying scheme, keeping the balance sheet stable.

Recent figures have been OK – not really good, but not  disastrous as in August.    Non-Farm Payrolls were better than expected, weekly jobless claims are on the fall, retail sales improved and more indicators could have been worse.

So, this supports a pause this time. I don’t see a high chance of more extreme measures such as raising inflation targets, an idea that Bernanke raised in Jackson Hole but took off the table quickly.

Extended period of time

Regarding the Federal Funds rate, there’s a huge consensus that it will remain at a maximal level of 0.25%, and that the wording about future moves won’t change – the rate will remain at low levels “for an extended period of time”.

Bernanke can always surprise and introduce more extreme measures such as additional quantitative easing steps. Goldman Sachs suggested that a new scheme, in a scale of one trillion dollars will be introduced in November. This depends on data that will be accumulated till then. In the meantime, the “wait and see” scenario is of higher probability, at least for this decision.

I think we will see choppy trading in the hours around the meeting but no long term effect.

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