Today and tomorrow, March 19-20, the FOMC begins a two-day meeting. Let’s preview what investors can expect from the meeting and the Wednesday afternoon press conference with Chairman Bernanke.
1. The FOMC has adjusted the statement release time for this meeting from 12:15 p.m. to 2 p.m. Chairman Bernanke will begin his press conference as usual at 2:30 p.m. Reducing the window from statement to press conference from two hours to 30 minutes should quiet the choir of speculation that has been occurring in the wake of recent statement releases.
2. At the January 30, 2013 meeting the FOMC digested economic data that was weaker than consensus estimates throughout the month of December. This meeting, the data present a 180-degree view, much better than consensus estimates for the month of March. Some of the FOMC’s recent commentary provided insight how they will acknowledge the data improvement.
3. Since the January meeting, voting member Charles Evans suggested a need for six months of +200,000 in payrolls before altering the current quantitative easing measures. Voting member James Bullard offered a potential $15 billion reduction in the monthly purchases for every .1% drop in the unemployment rate. Finally, Chairman Bernanke told Congress in late February that QE will continue until “substantial improvement’ in the outlook for the labor market is present.
4. Investors need a first focus on the FOMC’s $85 billion asset purchase program. When will that program begin to purchase less? Current Street estimates suggest Q1 2014 begins a yearlong process to bring the monthly purchase program from the current $85 billion per month down toward its end. Thereafter, potential rate hikes could be considered in 2015 if labor conditions improve closer to a 6.50% unemployment rate.
5. Expect the FOMC to acknowledge improved economic data, labor conditions, and housing. However, I also expect the FOMC to use the “cover” of the term temporary for this meeting. They will seek further confirmation before their next meeting on May 1 that the improvement is not transitory. They might suggest the recent data improvement is temporary as a result of a weather snapback or inventories. In essence, they will borrow President Ronald Reagan’s phrase “trust but verify.”
6. I do not expect much change in the current direction of assets correlated to FOMC policy. The U.S. dollar (Figure 1.1) will continue to trade with its prevailing near-term bull trend, Treasury yields (Figure 1.2) should not experience a large move in either direction, and lastly, gold (Figure 1.3) will have difficulty reversing this year’s down trend.
Figure 1.1 U.S. Dollar Index, March 2012 to March 2013
Figure 1.2 U.S. 10-Year Treasury Index, March 2012 to March 2013
Figure 1.3 Spot Gold Futures, March 2012 to March 2013