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What the Fed Will Do at Today's FOMC Meeting

By , Contributing Writer, Money Morning •

Optimism swept over investors following the September Federal Open Market Committee (FOMC) meeting, but don't expect the same when this month's two-day Fed meeting wraps up tomorrow (Wednesday).

In fact, don't expect much of anything. No surprises and nothing new are expected.

It's widely agreed that the historic low interest rates won't be raised anytime soon, and there will be no grand announcements of any further game-changing stimulus programs like the Sept. 13 QE3 statement.

No new policy measures are forecast either, as focus has shifted to the Nov. 6 presidential election. Minutes from the meeting will be released Nov. 15, after ballots are cast.

This month's meeting will be more ho-hum and about discussions not delivery.

"The Fed has entered a holding pattern while watching for signs of a substantial improvement in the labor market," Ellen Zentner, senior U.S. economist for Nomura Securities told MarketWatch.

What to Expect from Today's
FOMC Meeting

Since we have highlighted what not to expect, here is what you should expect.

  • Focus on Jobs

Listen for any words suggesting that the Fed's most recent efforts have begun to have an impact on the flailing U.S. economy, especially the jobless numbers.

The Fed may note that its moves are beginning to take effect, citing last month's drop in unemployment from 8.1% to 7.8%, the lowest level since January 2009, some 44 months.

Many on Wall Street questioned the September U.S. jobs report, labeling it suspicious and calling it a ploy to make President Obama look good heading into the election stretch.

Yet the outlook for the job market remains unchanged, still weak at best.

As Joshua Shapiro, an economist at consultancy MFR Inc. told The Wall Street Journal, "I take these numbers with an enormous grain of salt. I think the underlying trend is pretty clear in terms of the labor market-that it's still struggling quite mightily."

  • Interest Rates Unchanged

Expect to hear that interest rates will stay near zero for at least three more years.

As Randall Forsyth wrote in Barron's, "Now, interest rates are at rock bottom record lows. They aren't the problem, and thus they can't be part of the solution, as central bankers quite literally have run out of basis points. The Federal Reserve and its counterparts already have provided unprecedented volumes of excess liquidity to bolster asset prices."

The Fed maintains that is has plenty of ammo left in its arsenal to stoke the economy if it needs to move again, but has yet to elaborate on how that would be done. To date, with many triggers already pulled, we haven't gotten much bang for the buck.

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  • Change in Key Targets

At present, the Fed uses a calendar-date approach as a guide for the duration it expects to keep interest rates at current levels. The central bank may instead switch to a numerical target.

For example, at the summer's summit in Jackson Hole, WY, the Fed's Charles Evans discussed expanding QE until the unemployment rate falls below 7% or inflation rises above 3%. Deciding among its members of what those key numbers should be is the challenge.

As the International Business Times reported, there is a slight chance the Fed could tie in its future guidance to specific numbers tacked to the unemployment level and inflation. But, the more likely scenario is for this to occur at the December meeting.

  • Operation Twist

Operation Twist (swapping shorter maturity bonds for longer dated ones) is set to expire at year's end. The central bank is likely to consider whether to expand the program.

That would entail the purchase of $85 billion a month of mortgage-backed securities and Treasuries.

Skepticism has grown about the effectiveness of such asset purchases. Critics argue that what is eating away at U.S. economic growth cannot be cured with such loose monetary policy that some have instead labeled fiscal policy.

Bottom line: The Fed has time to wait-and-see on this decision, don't expect an answer.

"Operation Twist is to be completed by the end of the year," market analyst Marc Chandler told Forbes. "The Fed does not have to decide this now and so it won't.To some extent, it is likely data dependent."

Today's FOMC meeting will end with a statement release at 2:15 p.m. Wednesday.

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