Sunday, January 23, 2011

FOMC Preview

by Bill McBride on 1/23/2011 02:33:00 PM

There will be a two day meeting of the Federal Open Market Committee (FOMC) on Tuesday and Wednesday of the coming week. The FOMC statement will be released on Wednesday around 2:15 PM ET, and I expect no changes to the Fed Funds rate, or to the program to reinvest principal payments, or to the Large Scale Asset Purchase program (LSAP, aka "QE2").

The only questions are: 1) will the statement will be more positive than in December, and 2) how many members, if any, will dissent.

• The key portions of the December statement will remain the same. I don't expect the sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" to be changed any time soon. There might be some minor changes to the first paragraph to mention the recent improvement in economic data, but the second and third paragraphs will probably remain the same as in December:

... Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. ...

... The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. ...
• The voting committee members will change this month, and there may be more dissenting votes. The regional Federal Reserve Bank presidents serve one-year terms as voting members of the FOMC on a rotating basis (the NY Fed president is a permanent voting member).

This means Kansas City Fed president Thomas M. Hoenig will not be a voting member this year. Hoenig was the lone dissenting vote at every meeting in 2010.

Regional voting members this year include Charles L. Evans, Chicago, Richard W. Fisher, Dallas, Narayana Kocherlakota, Minneapolis and Charles I. Plosser, Philadelphia. Both Plosser "The Scope and Responsibilities of Monetary Policy" and Fisher "The Limits of Monetary Policy" have expressed reservations about QE2. So there might be two dissenting votes this week.