Macro Wrap – Expectations for the Fed

by Enis December 12, 2012 7:48 am • Commentary

With Operation Twist ending, what’s the Fed likely to do today?  Are there any new signals that the Fed is likely to send about monetary policy for the next 6 months?

The Fed has shown a strong desire to match or exceed market expectations in each of its new programs, most emphatically demonstrated by their implementation of QE3 in September, even with the market trading near its 5 year highs at the time.  As a result, market participants’ expectations into this meeting are high today.

Here is general consensus for today’s actions:

  1. The Fed replaces Operation Twist with QE-financed Treasury Bond purchases of $45 bln per month, in addition to its existing MBS purchase program of $40 bln per month
  2. The Fed will keep the maturity bucket of its Treasury purchases the same, though some expect that it might tilt its buying towards the 5 year bucket (away from the 10 year bucket)
  3. A possible introduction by Bernanke during the press conference of targeting specific inflation and employment thresholds going forward.  Few expect a change in communication at the current meeting, but maybe a signal that such a policy will be implemented in 2013.  Based on recent Fed governor speeches, the consensus thresholds at the Fed seem to be 6.5% unemployment and 2.5% inflation

The main initial focus will be on the size of the monthly Treasury Bond purchases, and any indications by the Fed that it might adjust the monthly purchase program going forward.

Markets overnight:

  • Asia was broadly green, with the Hang Seng up 0.8% leading the way
  • Europe has traded close to flat for most of the session, up 0.2% right now.  SPX futures are up 0.4%
  • The dollar and Treasury bonds are lower, and commodities mostly higher, led by copper and oil up 0.5-0.75%
  • The FOMC statement will be released at 12:30 pm EST, followed by Bernanke’s press conference at 2:15 pm