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FOMC Meeting Preview

09/19/2011

The Federal Open Market Committee (FOMC) meets Tuesday and Wednesday this week for the sixth time this year. There will not be a post-meeting press conference for Chairman Bernanke on Wednesday. After this meeting, there remains two FOMC meeting in 2011 – November 2 and December 13.

From late July until the early morning of August 9, the S&P 500 Index declined close to 20%. The FOMC has been instrumental in supporting the capital markets on two occasions since that morning. One was the afternoon of August 9 (Fig 1.1) when the FOMC committed to “exceptionally low levels for the fed funds rate at least through mid-2013.” And on Friday, August 26, as the S&P 500 was in the midst of a correction that placed the Index perilously close to the August 9 1101.54 low, Chairman Bernanke provided a second lift (Fig 1.2) to the capital markets with his Jackson Hole address.

For the upcoming FOMC meeting, let’s take a look at some expectations and potential consequences:

  • I would expect any measures enacted not to have the appearance of an official QE3 implementation.
  • I would not expect an announcement that will either expand the size of the Fed’s balance sheet or reduce it.
  • However, I do expect that “Operation Twist” will be announced.  (Operation Twist:  an extension in duration of Treasury holdings. As bonds mature, the proceeds are reinvested into the long end of the Treasury curve.)
  • A possible additional move would be to cut the interest rate on excess reserves.
  • Keep an eye on the dissenters. At the August meeting, FOMC members Plosser, Fisher, and Kocherlakota all dissented. Not since 1992 have there been three dissenters.       

 Fig 1.1 S&P 500® Index Price Action Post August 9 FOMC Meeting
 
Source: Bloomberg

Fig 1.2  S&P 500 Index Price Action Post August 26 Jackson Hole

Source: Bloomberg


 

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