Today new Federal Reserve (Fed) Chair Janet Yellen will head her very first policy meeting when the Federal Open Markets Committee (FOMC) begins its two day policy meeting. This first meeting could be the most significant meeting of this early 2014.
After the meeting concludes, we are expecting Yellen to announce, at the press conference, the Fed will likely use forward guidance towards interest rates. We also expect her to explain more how the FOMC will behave as the unemployment rate falls below its targeted 6.5 percent level. This is the level the Fed says they will raise rates once it goes below.
Even though he has already testified before Congress and gave her views and opinions, she was limited due to the last FOMC decision. This is the first chance she will chair and the first view we get as to where she will take monetary policy going forward. We are expecting the FOMC to taper another $10 billion a month in purchases from $65 to $55 billion a month. Barring any unforeseen market shocks. We are also expecting the Fed to keep rates stable especially if inflation does not go above its target of two percent.
Soft Economic Data Concerns the Fed
Since the last fed meeting, and through the first quarter of 2014, economic data has come in softer than expected. A lot of this has been blamed on the severe winter covering most of North America but there are some concerns that some of it is actual slowing down of the recovery. We have seen some signs that the U.S. economy is about to come out of this rough patch, as industrial production beat analyst estimates coming out at 0.6 percent in February. We do expect the Fed to reduce its growth forecast as well as unemployment numbers for the year. The change will be very little.
Still, as the Fed will still be buying assets, and could increase asset purchases at any time, it is unlikely this soft patch in data will prevent the Fed from pausing it’s tapering of QE. Therefore we will put our focus on whether or not there will be forward guidance as to how long interest rates remain at near zero. There is a large majority of the FOMC membership leading towards qualitative guidance instead of a numerical number.
The New Forward Guidance Regime
The new forward guidance structure is likely to have three components:
- Asset purchases- this gives a minimum amount of time for rates to be able to rise.
- Inflation- which is gaining more and more relevance as the economy improves.
- A number of labor market indicators to judge employment conditions to give a better view of the situation than just unemployment alone.
Asset purchases, or that element need no changes. The Fed is making purchases on a downward path that will see the end of QE by October or November. They will also maintain as super accommodative interest rate policy for a “considerable time” after QE ends. Interest rates will go up when the Fed decides it is time for them to go up. As far as inflation, the U.S. is in better shape than England for sure. Inflation seems to be returning slowly to its two percent target and should be there within the next 3 maybe 4 years.
Bottom line, the Fed is going to highlight that they will keep rates low as long as inflation is kept under control. We also expect them to bring less focus on the unemployment rate as it pertains to rate hikes.
Binary Options Take for the Day:
Watching interest rates and the spread between the 5 and 10 year yields. Depending on what the Fed says or does will impact the Dollar greatly. Any deviation can send the Dollar sharply lower. The euro still looks attractive as it remains bullish.
Discussion:
The Fed will reduce its QE again at this meeting and for the first time we will see what direction Janet Yellen will take the Fed as chair. What are your feelings? Do you think forward guidance is a good thing?