What To Expect From The FOMC Tomorrow
Sober Look | Jun 19, 2012 04:01AM ET
There has been some confusion about the potential policy actions the Fed could undertake at the next meeting. This is what we could expect from the FOMC tomorrow as well as the corresponding market reactions:
- It is highly likely the committee will announce an easing action of some sort.
- The policy decision will probably involve extended guidance, projecting Fed funds rate to be near zero for longer than in previous guidance announcements. Once again, this is expansion of credit in the US, QE would be difficult to justify.
Market reaction: Risk assets would rally (obviously depending on what else is going on globally).
All of these programs will have only a limited effect on the US economy. Even MBS purchases, the best option out there, are not expected to yield tremendous results in generating growth and jobs. A 30-year mortgage at 2% will put some cash in people's pockets for those who can refinance. But it's not going to improve the credit score for those who can not refinance or do not qualify for a mortgage. And the 10-year Treasury at half its current yield (which is what Japan has) is hardly going to help improve economic activity. But the Fed promised to stay vigilant, and given the limited toolbox, these policy moves may be the best the central bank will be able to accomplish on its own.
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