FOMC Expected To Continue To Taper QE, Update Forward Guidance

March 17, 2014

New York (Mar 17)  Economists expect the Federal Reserve to cut another $10 billion from its monthly asset-purchase program at its two-day monetary-policy meeting, lowering its monthly bond buys to $55 billion.

The Federal Open Market Committee meets Tuesday and Wednesday, and it will be the first one overseen by new Fed Chair Janet Yellen. Traders will focus on the commentary that accompanies the decision, which is slated to be released Wednesday afternoon. Additionally, during this meeting, the Fed will release its new economic forecasts.

Fed watchers said it’s likely the FOMC will talk about the impact of the severe winter weather and the effect on the economy. Economic data from January and February were lower than anticipated and many analysts and economists blamed this on the wintry weather that has hit much of the U.S. Brown Brothers Harriman said the Fed will likely signal that growth is expected to rise in the coming months and quarters now that winter is nearly over.
That could change the Fed’s economic forecasts, BBH said.   

The Fed “is likely to pare slightly this year's GDP (gross domestic product) forecast of 2.8-3.2%, which would simply recognize weaker (first quarter) activity, without changing its medium-term view. The unemployment forecast may also be tweaked lower. We would not expect the core PCE (personal consumption expenditures) forecasts to change,” BBH said.

Economists said financial and commodity markets will closely watch how the Fed modifies its forward guidance, especially as it relates to the monthly unemployment rate. The Labor Department said in the February nonfarm payrolls report that the unemployment rate is 6.7%. The Fed’s “threshold” for considering an increase in interest rate is 6.5%, and many economists said the central bank is likely to ditch that firm figure for something more nuanced. Since December 2012, the FOMC has said it wouldn’t raise the target for short-term interest rates until the medium-term outlook for inflation rose above 2.5% or the jobless rate fell to 6.5%.

“We expect it to drop the … thresholds, while maintaining other elements of the current forward guidance – including the notion that the committee still believes any increase in short-term rates is still a long way off,” said analysts at Nomura.

Nomura analysts said the Fed may try and lower the 2014 unemployment-rate forecast to 6.1% to 6.3% from the current forecast of 6.3% to 6.6%. The bank said the jobless rate continues to fall faster than expected by the Fed and private forecasters, which is why the Fed may ratchet down their forecast.

“However, given we are getting close to the FOMC's assessment of the ‘natural’ rate of unemployment, anything more than marginal downward revisions to the FOMC's unemployment rate forecasts could have a notable impact on the outlook for monetary policy,” they said.

Source: Kitco

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