federal reserve meeting today
FOMC Meeting: Fed Provides No Direction to Markets on QE, Adding to Volatility
Market participants were hoping for clarity following the highly anticipated FOMC meeting Wednesday on the big question: to taper, or not to taper?
As many expected, there were no explicit statements about when the Fed would end its massive quantitative easing (QE) measures.
"A few weeks back, I noted that Chairman Bernanke wouldn't have the guts to take his foot off the gas pedal when it came to stimulus, so it's no surprise to me that he's going to keep plowing $85 billion a month into bond buying," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "What's interesting to me is that the market fell anyway, when he announced the economic risks have subsided."
The U.S. central bank kept its benchmark interest rate at 0%-0.25%, and kept in place its $85 billion a month bond purchase program. The consensus remains that the Fed will start to "taper" QE before the end of the year - although the timeline wasn't made clear today.
"I think the markets didn't get the clarification they wanted," Fitz-Gerald continued. "Are things good enough that stimulus is no long warranted or bad enough that bond purchases are still required? For a guy who promised a new era in Fed transparency, this is yet more double talk."
As for when interest rates (near zero since December 2008) could be raised - likely a separate and farther-out move than tapering QE - Morgan Stanley Chief Economist and former FOMC secretary and economist Vincent Reinhart has said the clue is in when QE starts to end.
He says if QE and rate decisions are data dependent, as the Fed maintains, the two cannot be separated. So any future Fed tapering talks suggests Team Bernanke has grown more optimistic about the health of the economy and less inclined to believe further QE will prove advantageous.
Bernanke said today any change in policy will come after stability in the Fed's economic forecasts.
One Reason the Fed Meeting Today Might Not End in QE3
Dismal economic reports for the United States have recently made the stock market rise - not the expected reaction.
That is due to traders anticipating that a third round of quantitative easing (QE3) or a similar measure will be coming to stimulate the American economy.
Yet, despite unemployment rising in the United States and growth falling, no major economic stimulus programs along the lines of QE3 have yet been announced by Federal Reserve Chairman Ben Bernanke at any Fed meeting.
The timing of QE2 explains why.
QE2 was a program where the Federal Reserve inflated its balance sheet to purchase about $700 billion in U.S. Treasury bonds to finance the federal budget deficit. This unprecedented act was required as few other investors, either foreign or domestic, were buying U.S. Treasury bonds at the prevailing interest rates.
Without this action, the low interest rate environment promised by Bernanke until at least 2014 and imperative for the recovery of the United States economy, particularly the real estate sector, would have been untenable.
The Federal Reserve as a result became the "buyer of last resort" for U.S. Treasury bonds.
QE2 was announced by Bernanke at the Jackson Hole economic policy summit in August 2010. However, the Fed's bond buying did not start until after the mid-term elections in November 2010. QE2 ended in June 2011.
That is why QE3 has neither been announced nor initiated.
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Today's FOMC Meeting: Here's What the Fed Could Do
U.S. Federal Reserve Chairman Ben Bernanke will address the nation after today's FOMC meeting, and there's not much left in his bag of tricks to stimulate the U.S. economy and avoid the recession many are predicting for 2013.
After more than three years of trying to rouse the economy, hiring remains weak, unemployment is still elevated, and economic growth has ebbed.
As the Fed concludes its two-day policy meeting today, it needs to act sooner rather than later - and may be ready to do so.
"I think Fed officials will send a pretty decisive signal that they are prepared to provide more support to boost economic growth and lower unemployment," Brian Bethune, economics professor at Gordon College in Massachusetts, told the Associated Press.
Here is a trio of scenarios Team Bernanke could present.
What Could Happen at Today's FOMC Meeting
#1: The Fed Continues Operation Twist
There's a good chance the Fed will decide to continue its previous monetary stimulus method, "Operation Twist."
Under this strategy, the Fed traded $400 billion in short-term bonds for those with longer maturities. The goal of the twist is to drive down long-term interest rates.
This creates an environment that makes it cheaper for businesses to obtain loans and for consumers to get a hold of mortgages and other forms of credit.
Goldman Sachs Group Inc.'s (NYSE: GS) chief economist Jan Hatzius said in an e-mail to clients he expects the Fed to start a new asset purchase program.
"A decision not to ease is tantamount to a tightening. At this point we'd be quite surprised if we saw no easing," said Hatzius.
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- What to Expect from this Week's FOMC Meeting
Three Moves to Make Before the Next FOMC Meeting
The decisions made at the next Federal Open Market Committee (FOMC) meeting on Sept. 20-21 could affect market performance for years to come.
That's why investors should prepare ahead of time.
Of course, there's no way to predict exactly what U.S. Federal Reserve Chairman Ben S. Bernanke will do, but 20 years of experience in global markets suggest he's considering five alternatives drawn from a rapidly diminishing menu of options:
- Eliminate interest paid on reserves.
- Sell short-term securities while buying longer-term debt.
- Target actual inflation.
- Buy more assets outright in a program that would be somewhat like the $600 billion worth of Treasuries it bought as part of QE2.
- And, finally, it could just do nothing.
Let's look at the Fed's options first.
Option #1First, the Fed could eliminate interest paid on reserves. Banks would hate this, but it would go a long way towards encouraging lending.
Banks right now are borrowing at extremely low rates, building up huge cash stockpiles and investing the spread. By doing this, the banks are earning more than they would from even their best customers at a fraction of the risk.
Customers have become almost irrelevant as a result, which is something our leaders cannot seem to grasp. So while they're ostensibly all about helping Main Street, they're really just selling out to Wall Street.
We have to get the money to the consumer where it can be used to create wealth.
Option #2The second solution is to sell short-term securities while buying longer-term debt. You may recall that the Fed did this in 1961 as part of something they called "Operation Twist."
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