FOMC Preview: Markets Counting on Easing Gesture

September 13, 2012

Analysts expect a concrete easing action of some sort from the Federal Reserve, particularly after Chairman Bernanke’s dovish remarks at Jackson Hole that expressed dissatisfaction with the U.S. Labor market.  Gestures can take any number of forms: tweaking the projected likely date of an initial fed funds rate increase, cutting the interest on bank reserves, a third round of quantitative easing, or expanding Operation Twist additionally.  Fed watching takes on an extra complication prior to presidential elections.  Commentators have decided that enough instances of policy changes in past election years exist to conclude that this factor will not impede Fed officials and have disregarded the most notable exception four years ago when the Fed made no change in stance just days after the Lehman Brothers collapse.

The last FOMC meeting was on August 1, and one more before the November 6th election is planned for six weeks from now.  The August 1st statement downgraded its overall assessment of the U.S. growth performance and of the labor market in particular.  It also observed that inflation had declined “since earlier this year,” but no policy changes were made.  The expansion of Operation Twist announced in June and now running through end-2012 continues to be implemented.  This is a way for the central bank to lengthen the maturity of its asset holdings.  Back at its first meeting of 2012, the Fed shifted its predicted start of interest rate tightening from no earlier than mid-2013 to no earlier than late 2014, and that guidance is widely expected to change today.

Since the August 1 meeting, the Dow Jones Industrial Average has strengthened 2.5%, 10-year Treasury yields have risen 23 basis points, and oil and gold prices have climbed by 10.4% and 8.1%.  The dollar is 4.6% weaker against the euro now than then, and it has also slipped 0.8% versus the yen.

The FOMC rate announcement,  a fed funds target of zero to 0.25% since December 2008, will be made at 12:30 EDT (16:30 GMT) and be followed by a Bernanke press conference starting at 14:15 (18:15 GMT).  New staff macroeconomic forecast are due and well as new information on individual FOMC member forecasts regarding the future guidance of the policy interest rate.

  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 1.3778 76.34 1.93 11377 86.74
11/02/11 1.3724 78.11 2.03 11805 92.77
12/13/11 1.3067 77.92 1.98 12130 100.20
01/25/12 1.3027 77.96 1.97 12670 98.85
03/13/12 1.3096 82.76 2.08 13044 106.34
04/25/12 1.3226 81.37 1.97 13096 104.13
06/20/12 1.2693 79.28 1.66 12837 83.63
08/01/12 1.2300 78.10 1.49 13028 88.98
09/13/12 1.2891 77.50 1.72 13350 98.27

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

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