- Focus is on asset purchases and, with a review of the QE programme scheduled for this meeting, we are likely to get new information.
- We do not expect changes to the current pace of purchase or to the forward guidance on interest rates.
- The FOMC could choose to include individual forecasts for the Fed's balance sheet in the economic projections and signal that assets could be held to maturity.
- We expect the tone at the press conference to be balanced but markets are sensitive to changes in the QE language, and there is room for higher US rates.
The March FOMC meeting is set to contain a lot of information. On top of the statement, we expect to receive updated economic projections and Bernanke’s comments at the press conference. While we do not expect the statement to alter the pace of asset purchases from the current USD85bn per month or change the forward guidance on interest rates, the meeting is nevertheless interesting.
In particular, the minutes from the January FOMC meeting stated that a review of the asset purchase programme was on the agenda for the March meeting. At least three questions are likely to be discussed. First, we expect a review of the potential costs versus benefits of expanding the balance sheet further. Second, what will decide when the Fed should end its purchases? Third, should the Fed change the June 2011 exit strategy and keep its assets on the balance sheet to maturity.
Given the relatively dovish comments from Bernanke and Yellen in recent speeches, we expect the language on the QE programme to reflect that a majority in the FOMC still see the benefits of more QE exceeding the potential costs. Although the Fed would like to be clear in its communication, we think the language in the January statement is saying that QE will continue until it sees a ‘substantial improvement’ in the labour market will probably have to suffice. One way to improve the guidance, would be to add individual participants’ forecasts of the expected path of the balance sheet in the Summary of Economic Projections. We see the likelihood of such a move tomorrow.
In terms of the exit strategy and in particular when the Fed will start selling its assets, we are likely to have to wait until the minutes are released for full information. Bernanke is likely to get the question at the press conference, and is likely to signal that the Fed could choose to keep its assets to maturity. The big question is whether holding the assets longer would mean lower purchases today. If Bernanke signals that the Fed is considering such a substitution it would be likely to be interpreted as hawkish and send US rates higher.
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