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While the U.S. Federal Reserve will have an abundance to say about the economy today (Wednesday) when it concludes its two-day FOMC meeting, little is expected in the way of change.
The Federal Open Market Committee meeting will conclude Wednesday afternoon with a statement, revised forecasts and Chairman Ben Bernanke's news conference. The Fed will most likely reiterate that it will keep short-term interest rates at record-low levels through 2014. The Fed is not expected to commence any new program to lower longer-term rates unless the economy weakens.
That would diverge from the Fed's stance just three months ago when the January FOMC meeting ended with indications that Team Bernanke was leaning toward a third round of bond buying (QE3) to pump more cash into the troubled economy. More Fed bond purchases have been proposed as a means to drive down long-term rates to encourage borrowing and spending.
Since then, data on the U.S. economy has indicated a gradual strengthening, and the ongoing European sovereign debt crisis appears less ominous than it looked at the start of the year. Those developments argue against additional Fed bond buying.
"This will be a wait-and-watch meeting," David Jones, chief economist at DMJ Advisors, told the Associated Press. "Despite all the theatrics with a Bernanke press conference and new economic forecast, I think we will get a very predictable outcome-no change in policy."
That portends the Fed will retain its plans to keep its benchmark interest rate, the federal fund rate, at record lows until at least late 2014. The Fed planted that expectation at its January meeting and said nothing to change that hope when it met in March.
Today's FOMC Meeting: QE3?
Since December 2008, at the height of the financial crisis, the funds rate has held near zero. Consumer and business loans linked to that rate have enjoyed historic low levels since. The hope is that the low rates will entice individuals and companies to borrow and to spend, and thus stimulate the ailing economy.
With interest rates at near zero, and little left in its cache of tricks to goose the economy, the Fed implemented two rounds of Treasury bond and mortgage-backed securities purchases, inflating its asset holdings by more than $2 trillion.
In January, at Bernanke's quarterly news conference, the chairman said a third round of bond purchases "was certainly on the table."
But a fresh round of quantitative easing (QE) looks increasingly unlikely.
The Wall Street Journal's Jon Hilsenrath writes, "The outlook doesn't look like it's shifting in a way that would support new initiatives to boost economic growth."
While most economists don't expect the Fed to announce further bond purchases Wednesday, they do expect Bernanke and his cohorts to keep that option open.
Those wishing for further QE may be buoyed by the fact that recent economic data is still less than rosy. The housing market rebound is rocky, jobless claims keep inching up and regional manufacturing reports show signs of slowing growth.
A $400 billion Fed bond-buying program under way dubbed Operation Twist, under which the Fed sells shorter term securities and buys longer term bonds in an effort to drive down long-term rates, is set to expire in June.
If the Fed hints Wednesday that Operation Twist will end as scheduled, investors may react in disappointment, sending stocks down and bond yields up.
In fact, some economists are concerned that investors could misconstrue the Fed's outlook and statement, triggering a huge change in sentiment.
"We worry that the market could misread a hawkish intent in the information the FOMC will release on Wednesday," Bank of America (NYSE: BAC) economists advised clients this week. "We thus caution investors to be wary of another "Fed fake.'"
Whether or not the FOMC meeting Wednesday results in more Fed "twists" or "fakes" is yet to be seen, but the Fed will likely remain steady and true to form.
The FOMC will release an interest-rate statement at 12:30 p.m. EDT and will release its quarterly growth, unemployment and interest-rate forecast at 2 p.m., followed by a press conference with Bernanke at 2:15 p.m.
Related Articles and News:
- Money Morning:
QE3, $2,200 Gold, and the Trillion Dollar Bazooka
- Money Morning:
Bernanke Testimony to Congress: The World According to the Federal Reserve
- Money Morning:
The Bernanke Effect on Gold Prices, Silver Prices Means Time to Buy Metals
- The Wall Street Journal:
FOMC Preview: Watch Out for Fed Fakes
- USA Today:
Fed not likely to change rates Wednesday; statement is key