Fed will hold market’s hand as it ends QE3
The Federal Reserve will go out of its way this week to send soothing signals to investors already unnerved by recent market volatility and worries about the global economy.
There are no press conferences or updated economic forecasts after the U.S. central bank’s two-day meeting Tuesday and Wednesday and markets will be left to look for signals from the Fed’s policy statement, which will be released at 2 p.m. after the talks conclude.
In the statement, the Fed is likely to announce that it will stay the course and end its third round of bond buying, otherwise known as QE3, economists say. For months, the Fed has been signalling its intention to end the program at this meeting.
As a result, November will be the first month in 37 months that the Fed will not be buying longer-term securities, said Michael Gregory, deputy chief economist at BMO Capital Markets.
The Fed has purchased $1.6 trillion in Treasurys and mortgage-backed securities since September 2012, said Michael Gapen, economist with Barclays.
The U.S. central bank is also expected to keep intact its forward guidance that the Fed will wait a “considerable time” before hiking short-term rates.
“The Fed has little appetite for minor tweaking of language,” Gregory said.
Minutes of the Fed’s previous meeting in September revealed the central bank was worried about being misinterpreted by financial markets if it changed its guidance.
This result, if it occurs, “should feel dovish” as the Fed “leans against the potential fallout from the current global growth slowdown and disinflationary impulse,” said Millan Mulraine, economist at TD Securities.
The Fed’s main message to the market is that the central bank will not tolerate persistent low inflation expectations reflected in recent bond market trading, said Paul Edelstein, director of U.S. financial economics at IHS Global Insight.
Inflation is being pushed lower by the stronger dollar, slowing global growth and lower oil prices, Gregory of BMO said.
Market-implied inflation forecasts have taken a nose-dive since the summer, based on the so-called breakeven rates, or the difference between 5-year Treasury note yields and 5-year Treasury inflation-protected security yields.
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