PREVIEW: FOMC rate-decision due at 1630GMT (1230EDT) followed by Bernanke’s press conference at 1815GMT (1415EDT)
- The FOMC is expected to keep the Fed funds rate unchanged in the range of 0%-0.25%
- Policymakers may consider large-scale purchases of MBS to help the housing sector
- The FOMC may cut its growth and inflation projections for 2011 and 2012
At the end of their two day November meeting most analysts don’t expect the FOMC to announce any major policy alterations owing to decent economic dataflow from the US in the past month. This recent build in positive sentiment may delay the decision for further easing measures at this stage and lean towards adopting a “wait and see” approach. However, the housing market in the US remains weak, and the housing data in the past month was mixed, which may prompt the Fed to take further measures to help the sector. In its last meeting, the Committee already took the step of reinvesting principal payments from its holdings of agency debt in agency mortgage-backed securities in order to lower the yield on MBS. The next progressive step would be large-scale purchases of MBS, which will also send a strong signal to the market that policymakers intend to act pro-actively to strengthen the housing market. A more targeted easing approach may help the Central Bank to arrive at a unanimous conclusion, and may convince Kocherlakota, Fisher and Plosser not to dissent this time.
Following the rate-decision, market participants will focus on Fed’s Bernanke press-conference to gather insight into policy options discussed during the meeting. Among other details, the Chairman will present the FOMC’s latest projections for GDP, unemployment and inflation. If the Central Bank slashes its growth and inflation projections for 2011 and 2012 that may weigh on riskier assets, however that may also provide the Fed with the freedom to conduct further policy easing. Alternatively, if the growth forecast is downgraded but that for inflation is either kept unchanged or boosted, policymakers may be reluctant to opt for more easing. A combination of QE together with sterilisation could still be considered, which would have the effect of promoting growth without contributing towards inflation. Meanwhile, Bernanke has remained a strong supporter of setting explicit targets on inflation and unemployment, hence the Chairman may be quizzed whether this unlikely scenario was discussed in any detail.
So far for this meeting the market has priced in no significant policy movement, and if this be the case, the reaction is likely to be muted. However, if the FOMC decides for additional purchases of MBS, the long-end of the yield curve will likely come under pressure. In the unlikely scenario of setting an explicit target on inflation, the USD-Index may come under selling pressure and strength is likely to be observed in T-Note futures.