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Sunday, March 13, 2011

FOMC Preview

by Calculated Risk on 3/13/2011 01:30:00 PM

My thoughts are with the Japanese ...

There will be a one day meeting of the Federal Open Market Committee (FOMC) this coming Tuesday. The FOMC statement will be released 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").

Some questions are:
1) how will the statement differ from the January statement,
2) will there be any mention of "tapering" off QE2 purchases (as opposed to ending abruptly in June),
3) and will any members dissent?

1) Possible Statement Changes. I don't expect the key 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 and employment data (and possibly mention additional downside risks from higher oil prices and maybe Japan). Also the FOMC statement will continue to note that "measures of underlying inflation are somewhat low", but they might modify or remove the sentence "the measures of underlying inflation have been trending downward."

2) Tapering off of QE2 Purchases? Back in January I heard speculation that the Fed might taper off the QE2 purchases of treasury securities to "promote a smooth transition in markets". That is what the Fed did with previous purchase programs.

However Jon Hilsenrath recently noted in the WSJ that there will probably be no tapering this time (He usually has excellent sources at the Fed):

"Though the idea of tapering has received some attention on Wall Street of late, officials seem unlikely to want to follow that course this time ..."
Hilsenrath also suggested the Fed will probably take a wait and see approach after June to see "how the economy performs later in the year without [QE2]."

As I noted in When will the Fed raise rates?, this suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 0 to 2 months later.
• Drop extended period language a couple months later
• Raise rates in early 2012.

That is probably the earliest the Fed would raise rates - and it could be much later.

3) Dissent? There was some discussion last month that one or two Fed presidents might dissent (both Dallas Fed President Richard Fisher and Philly Fed President Charles Plosser have expressed reservations about QE2). However it appears both will now support the completion of the $600 billion Large Scale Asset Purchase program, but probably oppose any further expansion.

Earlier on U.S. economy:
Summary for Week ending March 11th
Schedule for Week of March 13th