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Financial markets have sometimes been turbulent after the release of the Federal Open Market Committee (FOMC) meeting statement.
For example, when the U.S. Federal Reserve announced on Aug. 9, 2011 to keep interest rates at a record low, the Dow plunged 205 points. Then before market close it turned around and closed 429.92 points, or 4%, higher.
According to former Fed governor Laurence Meyer, FOMC meeting statements on monetary policy are the second biggest market-moving events. FOMC meeting minutes releases are the first.
But the Fed is trying to change that.
In fact, the Fed will now issue its statement at 2 p.m., to give Chairman Ben Bernanke an opportunity to better control the message it sends to financial markets. Usually there are a couple hours that pass between the statement release and Bernanke's press conference.
"They probably did some research and said the market has periods of increased volatility right after the announcement," Robert Pavlik, chief market strategist at Banyan Partners, told the Associated Press. "Well, of course there's going to be. That's the way it works."
The Fed hopes the decreased time lapse will allow chief Bernanke to shed more light on Fed policy and prevent wild market swings based on speculation or concern.
"They are trying to be more open and work with the market to some degree. It's probably a good thing," said Pavlik. "You don't want to give away the store but to try to get their message across so that people can understand it in real time makes a lot of sense. Maybe, if they could put it in language that the average man can understand, instead of double-Fed-talk, it would probably make even more sense."
This Week's FOMC Meeting
Regardless of timing, tomorrow's FOMC meeting isn't likely to trigger a volatile market reaction.
The Fed has pledged to keep the purchases up until it sees a substantial and sustainable improvement in the labor market. The central bank also promised to keep interest rates at rock-bottom levels until the unemployment rate hits 6.5% or inflation rises to 2.5%.
Presently, both thresholds appear distant. Unemployment remains at an unhealthy 7.7%, and (government-reported) inflation is running at 1.98%.
News that the Fed will officially start to end monetary easing would be one of the only announcements that could move markets. If the Fed says it's winding down or ending its easy credit measures, it'll jolt financial markets, causing rates on long-dated Treasurys to rise and stock prices to swoon.
"The Fed has artificially depressed long-term interest rates and artificially boosted the stock market for such a long period of time and by such a large amount, that no one can predict how much financial market instability will occur at the first hint they are pulling back on accommodation," David Jones, chief economist at DMJ Advisors told the Associated Press.
Even though recent FOMC meeting minutes have shown dissent among members, they're likely to hold back from a major policy change now that the sequester is in effect. Look for the FOMC meeting to discuss how fresh government spending-increase cuts could hamper economic growth.
"There's a general sense that fiscal policy will take a bite out of growth this spring and summer. I think they're very nervous that as spending cuts take hold, the numbers are going to look softer," Mark Zandi, chief economist for Moody's Analytics told CNN Money.
The FOMC March statement will be released at 2 p.m. Wednesday, with Fed Chairman Ben Bernanke's press conference to follow at 2:30 p.m.
Related Articles and News:
- The Wall Street Journal:
Fed's Crystal Ball Could Use Some Shining
- Associated Press:
Economists expect the Federal Reserve to keep interest rates low
- Denver Post:
Fed to change timing of policy statement