On Wednesday, March 20th, the FOMC will conclude their 2-day meeting. In an effort to better facilitate information and reduce market volatility the Federal Reserve decided to cut the time in between the FOMC statement and the beginning of the Chairman’s press conference. Accordingly, they will release their March statement in conjunction with the summary of economic projections at 14:00ET/18:00GMT, followed by Bernanke’s news conference at 14:30ET/18:30GMT. Ideally, this may improve transparency as it will allow the Chairman to further clarify the FOMC’s position with regard to their economic outlook and monetary policy, and thus it leaves less to market interpretation.
We anticipate no change to the Fed’s current $85B a month pace of Quantitative Easing – $45B of Treasuries and $40B of Mortgage-backed securities (MBS), or a shift in their interest rate guidance from 0-0.25%. Under this scenario, the markets will likely focus on the tone of the FOMC statement as well as on any changes to their economic outlook. Economic data has improved notably since their meeting in January, especially in the labor market, and consequently we think the Fed statement could sound more upbeat on the economy. However, this could be somewhat muted by the Committee’s growth forecast, which may be revised slightly lower due to the overall impact of the payroll tax increase as well as the effects of the sequester. Outside of GDP, there has been little to suggest that the FOMC will need to meaningfully adjust their projections for inflation or the unemployment rate.
That said, everyone may ultimately be waiting for Bernanke’s press conference, as the Fed’s meeting minutes from January frightened the markets as they showed the broad range of opinion within the FOMC regarding the pace of long-term asset purchases as well as their differing views on a potential exit strategy – several members said the Fed should be prepared to vary the pace of QE and a number of officials said that tapering QE may become necessary, however several others warned of reducing or ending QE too soon. The Chairman calmed these nerves at his semiannual testimony to Congress, when he signaled the Fed would continue their asset purchase program, arguing that “we do not see the potential costs of (QE)…outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.” Furthermore, Bernanke recently stated that the Fed intends to continue to sustain Quantitative Easing until there are ‘substantial’ labor market gains. The biggest dove in the FOMC, Chicago Fed President Evans, gave us some insight on this at the beginning of the year when he suggested the Fed should continue to provide QE until the US sees monthly job growth averaging 200K for six months. Interestingly, the current 6-month average of Non-Farm payroll gains is 186K.
In our view, the Fed shifting away from QE is unlikely to be imminent, especially in light of the recent events in Cyprus this week; however the prospects of ‘tapering’ may become more necessary later in the year should we continue to see improving U.S. employment figures over the coming months.