FOMC Preview

September 21, 2011

The FOMC statement following a two-day meeting is expected to be released around 14:15 local time today (18:15 GMT).  After last month’s meeting, Federal Reserve officials released a statement that downgraded the assessment of the U.S. economy, projected a slower pace of growth for coming quarters, attached greater downside risks to that new baseline forecast, projected a drop in inflation to “levels at or below” one’s consistent with the central bank’s mandate, declined to introduce a third round of quantitative easing after discussing “a range of policy tools available to promote a stronger economic recovery in the context of price stability,” and instead tweaked its conditional rate guidance sentence to project “exceptionally low levels for the federal funds rate at least through mid-2013.”  The previous time period was “for an extended period of time,” which investors interpret to mean 4-6 months.

In the six weeks since the August 9 meeting, U.S. and European economic circumstances have deteriorated further, a fact that will no doubt be acknowledged in today’s new statement.  U.S. budget negotiations between Democrats and Republicans remain acrimonious and stymied.  The Greek debt crisis is much more dire.  The 10-year Treasury yield has fallen another 40 basis points (and 140 basis points since the FOMC meeting of April 27), and such is below 2.0%, something that was not the case during any FOMC meeting in 2008, 2009 or 2010.  Regrettably, oil prices are 5.7% higher now than six weeks ago, and gold has climbed over 4.0%.  The dollar is 4.0% weaker against the euro and off 1.2% relative to the yen.

Market chatter prior to today’s decision has been full of talk about the Fed’s hands being largely tied.  Three voting regional presidents on the Federal Open Market Committee — Fisher of Dallas, Kocherlakota of Minneapolis, and Plosser of Philadelphia — cast an unusually large number of dissenting votes against the change in the rate guidance language.  Rick Perry, the leading Republican candidate for president with a more than decent chance of assuming that position in 2013, has called Fed quantitative easing under Bernanke “treasonous,” so political constraints on the central bank’s ability to act independently are arguably the strongest they’ve been since at least 1951.  That being said, the Fed has many options and has demonstrated a flair for being bold and creative since the financial crisis first surfaced over four years ago.  Bernanke is smarter and better informed than his accusers, and he understands the importance of meeting or exceeding market expectations in situations such as the present.  His biggest problem will be resistance from the Fed presidents, who’d rather let time be the healer of the economy.  Four years have already passed since the U.S. financial crisis started.  It took over a decade and a world war to heal the mess of the Great Depression.  Japan has been waiting some twenty years for time to cleanse its financial and economic illness.  A strategy of “wait and see” may not offer the eventual fix that its proponents believe particularly if fiscal policy takes a sharp turn toward restraint.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4059 81.35 2.53 11174 84.59
12/14/10 1.3423 83.37 3.38 11497 88.47
01/26/11 1.3658 82.55 3.41 12001 87.36
03/15/11 1.3969 81.04 3.29 11815 98.09
04/27/11 1.4665 82.63 3.36 12612 112.48
06/22/11 1.4392 80.12 2.97 12175 94.87
08/09/11 1.4234 77.09 2.36 10993 81.76
09/21/11 1.3663 76.33 1.96 11409 86.40

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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