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Saturday, April 23, 2011

FOMC Preview

by Calculated Risk on 4/23/2011 05:44:00 PM

There will be a two day meeting of the Federal Open Market Committee (FOMC) this coming Tuesday and Wednesday. 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 things to look for:

1) Fed Chairman Press Briefing. This will be the first FOMC statement followed by a press briefing with Fed Chairman Ben Bernanke.

The FOMC statement will be released earlier than usual - around 12:30 PM ET on Wednesday, and the Chairman's press briefing will be held at 2:15 PM.

At the press briefing, Chairman Bernanke is expected to discuss the new FOMC forecasts (usually these have been released a few weeks later with the minutes of the meeting). Growth forecasts have probably been revised down since January, the unemployment rate revised down, and inflation forecasts revised up. Here is a table of the January (and November) forecasts for reference:

January 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP3.4 to 3.93.5 to 4.43.7 to 4.6
Previous Projection (Nov 2010)3.0 to 3.63.6 to 4.53.5 to 4.6
Unemployment Rate 8.8 to 9.07.6 to 8.16.8 to 7.2
Previous Projection (Nov 2010)8.9 to 9.17.7 to 8.26.9 to 7.4
PCE Inflaton1.3 to 1.71.0 to 1.91.2 to 2.0
Previous Projection (Nov 2010)1.1 to 1.71.1 to 1.81.2 to 2.0
Core PCE Inflation1.0 to 1.31.0 to 1.51.2 to 2.0
Previous Projection (Nov 2010)0.9 to 1.61.0 to 1.61.1 to 2.0

FOMC definitions:
1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

2) 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 softer economic data - and also slightly stronger employment data. Also the FOMC statement will continue to note that "measures of underlying inflation continue to be somewhat low", but they will probably note the recent pickup in inflation - and also say the increase is expected to be transitory.

3) Timeline for Fed tightening It appears QE2 will end in June as scheduled with no tapering of purchases. It also appears the Fed will continue to reinvestment maturing securities - at least for a couple of months following the end of QE2.

This suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 2+ months later.
• Drop extended period language a couple months later
• Raise rates in early to mid-2012.

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

Earlier on U.S. economy:
Summary for Week ending April 22nd