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This afternoon we'll get the latest out of the Fed, with a press conference by Chairman Ben Bernanke following the conclusion of the policy-setting FOMC meeting.
Expectations appear to center on no change in policy accompanied by an ever-so-slightly improved economic outlook, especially when it comes to the jobs market. In short, most observers believe the FOMC meeting will be a non-event from a policy perspective.
For the stock market, the question is whether no news will be good news.
The Fed's Operation Twist – in which the central bank shifted the emphasis of its $2.9 trillion balance sheet toward longer-dated securities in order to keep a lid on long-term rates – is slated to end in June. The Fed doesn't have another FOMC meeting until the end of June. That, some say, means the Fed will have to make up its mind this week about whether Operation Twist gets extended.
While there's a vocal minority of investors looking for another round of quantitative easing, or for the Fed to at least extend Operation Twist to mortgage-backed securities, Joseph Lavorgna thinks the Fed will signal it's done. “We continue to believe that Twist will end as scheduled this June. In general, if our forecast of modestly above-trend real GDP growth holds up, alongside a declining unemployment rate, the Fed will not pursue any further quantitative easing initiatives.”
As has been well documented, when the Fed's previous quantitative easing efforts have drawn to a close, stocks have headed south. If Bernanke does emphasize that we're not going to Twist Again, how will the market respond? Aye, there's the rub. The answer will depend on how resilient investors believe the economic expansion really is.
At least for now, the U.S. economy seems solidly on track for moderate if uninspiring economic growth. The jobless rate is down from nearly one percentage point from last summer and the global financial and economic outlook is less dire than last September when Europe seemed about to take financial markets back into the abyss.
Liz Ann Sonders, chief investment strategist at Charles Schwab, is among those who think it's time for stock investors to stop being afraid of higher interest rates and end their addiction to Fed easing measures.
She argues that the U.S. economy is experiencing a sustainable expansion and that a move higher in bond yields won't derail a recovery in housing. In fact, she argues, a rise in bond yields will squeeze investors out of bonds and into stocks, especially as they discover that yes, in fact, they can lose money on their bond investments. (She also thinks it would push “fence sitters” into the real estate market.)
“It's not until rates go up do you have that scare out of fixed income and into stocks,” Sonders says.
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. Lead writer Steven Russolillo spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com.
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