Sunday, August 08, 2010

FOMC Meeting on Tuesday

by Calculated Risk on 8/08/2010 08:34:00 PM

I mentioned the FOMC in the Weekly Summary and Schedule post, and here is some more ...

From the Financial Times: Fed set to downgrade outlook for US

The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery. ...

[The Fed might make] ... a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank ... most economists believe that it would take several more months of poor data for the Fed to actually begin a new round of [large scale] asset purchases
excerpt with permission
That is a good summary. The Fed will obviously acknowledge the weaker data since the last meeting in June, but they might view the last two months as a "pause" as opposed to a slowdown. In his recent testimony and his speech last week, Bernanke clearly felt the economy would continue to recover. Bernanke said:
While the support to economic activity from stimulative fiscal policies and firms' restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions.
A change in outlook in just a week would be significant.

It is possible that the Fed could announce they will reinvest the proceeds from maturing MBS (some people put this at $200 billion through 2011, but other analysts expect it might be closer to $400 billion with lower mortgage rates and more refinance activity).

It was just a couple of months ago that some Fed Presidents were arguing that the Fed should sell MBS in addition to the maturing MBS. Selling additional MBS is clearly off the table for now.