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Yep, nearly time to start talking about the next FOMC meeting, a two-day affair that begins this Tuesday.
Any big decisions regarding further quantitative easing are more likely to be taken later, closer to when Operation Twist is scheduled to end in mid-June. (Expect to see more stories using the “wait-and-see mode” formulation.) But on the schedule is the second iteration of the individual participants’ federal funds rate projections, and that could be interesting.
With that in mind, Neal Soss at Credit Suisse spots two potential drawbacks that could result from the meeting, emphasis ours:
First, it may be that financial market participants have become habituated to a flow of ever-greater liquidity injection. A Fed that continues to hold its existing stock (and composition) of assets may not be "good enough" for a market that may be reliant on arising stock. The period ahead will likely be an interesting real world experiment on the issue of stocks versus flows in securities pricing.
A second possible "fly in the ointment" comes ironically from the Fed's newfangled devotion to transparency. While the majority of Fed leadership are what one might colloquially label "dovish," there is also a hardy "hawkish" minority. At next week's two-day meeting, the FOMC will review and reveal new projections of various economic variables, assessments of appropriate timing of policy firming, and target fed fund rates out to 2014 and beyond. It should come as no surprise if one or two of the already more hawkish Fed officials who believe policy should begin to tighten in 2014 or sooner move their preferred timetable to an even earlier timetable.
For example, as of January, three FOMC participants thought policy should begin tightening this year; three more advocated 2013; while five favored 2014, four chose 2015, and two preferred 2016. The weight of opinion among all participants, and surely among the current voting members, resulted in the "late 2014" guidance communicated to the markets back then. While we expect that 2014 guidance to be reaffirmed at the April meeting, we also think it likely that the distribution as a whole would shift slightly inward in time.
The minutes of the March FOMC meeting showed a more hawkish interpretation of recent economic trends, and expectations of whether or not we’ll get further QE remain mixed.
It’s true that the US economy is on surer footing now than six months ago, but recently we’ve also had a payroll report that was weak relative to prior months; home prices have continued to fall; and the downward trend in jobless claims was revealed to be less impressive than we thought and even might have stalled (yeah, we know, the last one could just be seasonality issues). European debt markets have again become a focal point and there’s no way to know how fiscal-cliff-mageddon will turn out.
A reinforcement of the late-2014 language seems like the most reliable and least controversial way for the Fed to signal its commitment to the growth part of its dual mandate. So even if a shift in the above chart is slight, it seems an inopportune time for it.
Related link: Lame duck paralysis and fiscal-cliff-mageddon – FT Alphaville
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