Today's FOMC meeting will kick off a two-day discussion of economic policy – and will leave unprepared investors confused…
Both the FOMC policy statement and its economic and market projections will be released on Wednesday at 2 p.m. EDT and will be followed by U.S. Federal Reserve Chairman Ben Bernanke's press conference at 2:30 p.m.
[Editor's Note: Stay tuned to Money Morning for a Wednesday FOMC Meeting roundup.]
The question hot on everyone's tongue is what the FOMC will decide to do about the $85 billion in monthly bond buying – will the inevitable quantitative easing (QE) taper finally begin?
Every time the Fed has stopped a QE program, the markets tumbled:
Almost three-quarters of the 69 economists polled after August's jobs data was released anticipated the FOMC would vote to taper its bond-buying program, according to Reuters. The central bank is projected to trim its monthly spending on QE asset purchases by $10 billion.
Conversely, rumor has it the FOMC may, for a third consecutive time, lower growth forecasts for 2013.
That's because annual inflation is about half a percentage point below the goal the Fed set in December. Plus, although unemployment was lowered to 7.3% in August, that's mainly because so many Americans are dropping out of the labor force:
More than 4 million people have been out of work for more than six months, and a doleful 11.5 million are looking for work in total. In the first seven months of 2013, 953,000 jobs have been created; a full 731,000 of those, or 77%, have been part-time.
In sum, 22.1 million Americans are either unemployed or underemployed.
Even if the Fed doesn't announce a taper, it will be deciding on growth forecasts through 2016. Yes, that seems like a far-away number – but markets will react immediately.
What investors need to be ready for is the Fed to possibly announce a taper and also lower growth forecasts – two clashing moves.
So why would the FOMC do both?
"It wouldn't surprise me if the FOMC lowers growth forecasts for strategic reasons," says Money Morning's Capital Wave Strategist Shah Gilani. "If they lower them and then the numbers come in better than expected, they have room to start tapering and the market won't freak out as much."
On the other hand, if the FOMC meeting today raises the growth forecast or leaves it as is, and growth numbers come in lower, the market will rally on the belief that the Fed will not taper at all.
"The FOMC is inclined to move toward winding down their balance sheet and is counting on doing that if doing so won't freak out the markets and ruin the wealth effect triage triangle: pump up the banks, pump up the markets, pump up consumer confidence to pump up consumer spending," Gilani explains.
When Bernanke speaks on Wednesday after the Fed meeting concludes, he's anticipated to discuss the decline in unemployment, in addition to other jobs data like the drop in labor participation. Plus, he should discuss interest rates and issues stemming from the Syrian crisis and comment on the debt-ceiling debate.
The central bank will not release the minutes of the two-day meeting until Oct. 9, so you'll have to tune in Wednesday for Money Morning's FOMC Meeting Roundup.
It turns out the FOMC meeting today isn't the only hot Fed news swirling this week…