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Sunday, January 22, 2012

FOMC Meeting Preview

by Calculated Risk on 1/22/2012 03:20:00 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 "extend the average maturity of its holdings of securities" (scheduled to end in June 2012), or to the program to "reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities". I don't expect further accommodation (aka "QE3") to be announced at this meeting.

On Wednesday the FOMC statement will be released around 12:30PM and Fed Chairman Ben Bernanke will hold a quarterly press briefing at 2:15 PM ET.

A few things to look for:

1) FOMC participants' projections of the appropriate target federal funds rate. This will the first quarterly release of the participants' view of the appropriate path for the Fed funds rate. On Friday the Fed released blank templates for reporting participants' views. The first chart "Appropriate Timing of Policy Firming" will show when participants judge that the first increase in the target federal funds rate from its current range will occur. The second chart will the participants' view of the "Appropriate Pace of Policy Firming".

These charts will probably show that most participants judge that the first rate increase will occur in 2014 or later, and that most participants believe the appropriate policy path through 2013 will be no change in the Fed's fund rate.

2) Fed Chairman Press Briefing. At the press briefing, Chairman Bernanke will discuss the new FOMC forecasts including the two new charts on the Fed funds rate. Growth forecasts were routinely revised down all through 2011, and it is likely that GDP growth for 2012 will be revised down slightly again this month. However the unemployment rate for 2012 might be revised down or left unchanged.

I expect Bernanke will be asked about the possibility of a large scale MBS purchase program, but it appears too early for "QE3".

Here are the updated forecasts from the November meeting. The GDP projection for 2012 will probably be revised down slightly from the 2.5% to 2.9% range.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP12011201220132014
November 2011 Projections1.6 to 1.72.5 to 2.93.0 to 3.53.0 to 3.9
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.

The unemployment rate declined to 8.5% in December, and the projection for 2012 will probably be revised down slightly.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate22011201220132014
November 2011 Projections9.0 to 9.18.5 to 8.77.8 to 8.26.8 to 7.7
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

The forecasts for overall and core inflation will probably be mostly unchanged.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation12011201220132014
November 2011 Projections2.7 to 2.91.4 to 2.01.5 to 2.01.5 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation12011201220132014
November 2011 Projections1.8 to 1.91.5 to 2.01.4 to 1.91.5 to 2.0

If the economy under performs or even tracks the November projections, QE3 would seem likely at either of the two day meetings in April or June. Some have argued that QE3 could happen sooner, perhaps at the March meeting. If the economy performs better than expected, then the Fed will probably wait longer.

3) Possible Statement Changes. The FOMC met in December, and not much has changed - so the statement will probably be very similar to the December statement.

Investors will probably focus on any change to the sentence in the second paragraph: "Strains in global financial markets continue to pose significant downside risks to the economic outlook."

The FOMC will probably reiterate that they stand ready to take further action: "The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability."

The sentence "The Committee ... currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" will be removed and replaced with the Fed funds rate projections.

I expect the focus will be on the press briefing and the FOMC forecasts.

Summary for Week ending January 20th
Schedule for Week of Jan 22nd