by Jeff Miller
After weeks of speculation based upon speeches, newspaper columns, and pundit pontification we will finally have some hard information. Maybe. The two-day FOMC meeting will include not only the regular announcement of the decision, but also revised economic forecasts and a press conference by Chairman Bernanke. Everyone will be watching for any hints of a change in policy.
- Will the Fed reduce the pace of the current QE purchasing?
- If not, will it provide more information about the timing of a possible change?
- What might be the size of any reduction?
Those expecting early action seem to focus on September. Tim Duy reviews the most recent data and concludes, "Bottom Line: Today's data appears consistent with Fed expectations that they can begin tapering asset purchases this year. Still a horse race between September and December, although I think the Fed is aiming for the earlier date if data allows."
Those expecting later action point to the lack of inflation. Recoveries from recession are usually stronger and faster; that usually means inflation. Rex Nutting notes that it is the lowest core inflation in history.
Bloomberg (via Josh Brown) compares inflation to past recoveries. Josh concludes that the Fed has time to jawbone rather than changing policy. Here is the key chart:
If the Fed does change course, what will be the result?
Most market observers expect a major reaction at the first sign of a Fed policy change. They are not waiting for an actual increase in interest rates, but getting ready to head for the exits at the first sign of a policy shift. This analysis from Barclays, cited in The Economist, is typical. It shows the "sensitivity" of various markets to changes in the Fed balance sheet. There is no attempt to show a causal mechanism.
Intone after me:
Fed prints money. Liquidity, liquidity. POMO, POMO. Asset prices move higher – all of them!
I have some contrarian thoughts about what to expect from the Fed. I'll elaborate in the conclusion, but first, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"