UK BoE minutes, US Fed Statement And Forecast

Wednesday is a busy day for central bank news, starting with the release of the Bank of England's monetary policy committee minutes. The main event arrives later, in three pieces: the Federal Reserve's FOMC statement, its chairman Ben Bernanke's press conference and a new set of Fed economic projections.

UK Bank of England Monetary Policy Committee Minutes (08:30 GMT): Mark Carney, the incoming Bank of England (BoE) governor, formally takes charge on 1 July and so all things monetary for Britain are increasingly viewed in terms of how the new central banking chief will oversee and reinterpret policy. Yesterday’s inflation report is a reminder that he'll need to hit the ground running. Consumer prices inched higher, rising 2.7 percent for the year through May and dashing hopes that inflation’s recent deceleration would persist and move closer to the BoE’s two percent target. Not anytime soon. “Inflation will probably get above three percent in the next month or two,” predicts an economist at Capital Economics. It seems that the honeymoon for Carney may be over before it even begins. If the economy was growing at a faster rate, higher inflation would be tolerable. But it's still debatable if anything resembling a healthy recovery is in the cards for Britain.

Today’s release of minutes will be read in the context of what it implies, or doesn’t, for the Carney era that’s about to begin. For example, in last month’s release of minutes (for the Monetary Policy Committee meeting on May 8 and 9), there’s a reference to “weak” bank lending and a recognition that “some improvement over this year and next would support the recovery.” The minutes also noted that “inflation might well fall slightly in April before picking up to around three percent in the middle of the year,” which has been spot on so far.

Such details will be of interest to the market as the focus turns to Carney, who has a well-known preference for quantitative easing (QE) to bring about escape-velocity for an economy performing below its potential. Looking at the broad measure of Britain’s money supply (M4), however, suggests that monetary policy, for all the QE in recent years, still looks hawkish. Will Carney change the focus? If so, what will today’s release tell us about how such a shift will be received within the monetary policy committee? Stay tuned....

US FOMC Statement (14:00 GMT): No one expects the Federal Reserve to raise interest rates in today’s monetary policy announcement, but the topic is increasingly front and center. Quantitative easing is destined to end at some point, even if it was convenient in the past to downplay this fate. But with ongoing signs that the US economy will continue to grow at a modest pace, it’s getting harder to ignore the inevitable. Timing is unknown, of course, which is why today’s FOMC statement will receive closer scrutiny than usual.

The delicate art of reading between the lines will be in high demand for deconstructing today's release. If there's any doubt about what this or that phrase implies, investors—particularly in the bond market—are likely to assume that the evidence points to higher rates. Indeed, the yield on the benchmark 10-year Treasury over the past month has already jumped about 50 basis points to 2.2 percent as of yesterday. Momentum, in other words, still favours the bond bears.

Keep in mind that the FOMC statement will be followed with a press conference by Fed chairman Ben Bernanke for additional clarification. The Fed will also release a new quarterly economic forecast (see below). The bottom line: the central bank will dispense a lot of data and commentary in a short period today. Depending on what we read and hear, a wave of volatility may hit the markets as the crowd struggles to digest the burst of new information.

US Federal Reserve Economic Projections (14:00 GMT): In the previous set of estimates (released in March), the Fed trimmed the high end of its central tendency 2013 GDP forecast to a 2.3 percent-to-2.8 percent range versus December's 2.3 percent-to-3 percent outlook. Today's update, along with next year's projections, are the first numbers I'll be looking at once Bernanke and company's new GDP assumptions arrive. To the extent the predictions edge higher, the end of monetary stimulus is that much closer.

The final decision on when and how to wind down the Fed's USD 85 billion-a-month bond-buying program will factor in a wide array of variables, and the analysis will take time. We're still in the early days of the end game. But barring a macro bolt out of the blue, the exit strategy inches closer. It may be a long and protracted affair, riven with twists, turns and false starts, but we're at or near the slippery slope. How near? Today's newly minted projections will drop a few clues.