Market Prepares for FOMC Statement

Stocks are flat and the US dollar is nearing 2009 lows as the Federal Reserve prepares to release its monetary policy statement this afternoon. It’s a near certainty that the central bank will hold short-term interest rates in the zero to 0.25% band, which puts the focus on the Fed’s economic outlook and any mention of its exit strategy.

“We would be amazed to see anything in the FOMC statement today that even resembles a hint that the Fed is preparing to withdraw any of the net monetary policy support to the economy,” said Ian Shepherdson from High Frequency Economics. “The U.S. economy is now performing better because, and only because, of the policy intervention, both monetary and fiscal,” he added.

Indeed, last week Fed chairman Ben Bernanke announced the recession was “very likely over,” a comment some analysts believe was premature given the strains of the labor market. Bernanke was, however, only speaking from a technical standpoint, suggesting that the quarterly declines in gross domestic product have come to an end (he made it clear that recovery would be shaky at best.) Still, it’s not clear whether the Open Market Committee (FOMC) agrees with Bernanke, or whether they believed his words came at the appropriate time.

“Discussion of economic conditions will mention recent improvements in activity, but, following the theme of Bernanke's recent speech, the recovery is expected to be relatively weak and substantial resource slack will persist for some time,” said Brian Bethune and Nigel Gault, economists at IHS Global Insight.

Also of interest will be any talk of the central bank’s purchases of mortgage-backed securities. Thus far the Fed has purchased around $840 billion of MBS, and there’s been speculation that the Fed will choose not to fulfill its initiative to buy $1.25 trillion in total. Ditto for Treasuries.

“The Fed is concerned about ending the buying too abruptly, and has already announced purchases of Treasuries will be pared and extended,” said Jennifer Lee from BMO Capital Markets.

Within the statement itself, analysts from Nomura believe the Fed will opt to remove phrases such as “activity is leveling and out” and “is likely to remain weak”, and replace them with comments referring explicitly to low but positive growth.

Aside from the Fed statement, no macroeconomic data is scheduled for release today. However, following a record $43 billion auction in 2-year notes yesterday, the Treasury will hold an auction for 5-year Notes at 1:00. The benchmark 10-year yield is currently down four basis points at 3.44%.

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