What The Fed will most likely have said After Bernanke’s Spoken

Remarkably, there has never been a live post-policy press conference with a Federal Reserve chairman, before the one slated for 1415 EST/1815 GMT. This will clearly ascribe a degree of historical import to the one tonight, and the markets could be forgiven for expecting Bernanke to come up with something special. Most likely however, he won’t. That’s judging from the opinions of a number of soundings with Federal Reserve-obsessed economists, interest rates, fixed-income and forex players of varying types and institutions.

The main expectations:

• Fed will complete the purchases of Treasury securities by the end of June

• will trim growth forecasts and raise projected inflation estimates only slightly

• is not expected to alter rate guidance or make radical changes with reinvestment of MBS repayments

• will show little enthusiasm for QE3 and no commitment on what will be done with maturing securities

None of the above would be a surprise to markets, whether they’ve been following the trajectory of Fed Funds Futures or not.

Potential USD-negative surprises (seen as unlikely, but let’s go with it)

• there could be focus on disappointing performance of the US economy, downward pressure on real wages and weak core inflation

• Fed might reiterate the view that global imbalances and inflation reflect misguided emerging-market currency policy

• negativity could be a signal opening a door to QE3 if the outlook disappoints further

Potential for USD-positive surprises:

• a hard line on the fiscal situation and strong commitment to opposing further debt monetization

• any substantive concern that commodity price hikes may persist and lead to second-round inflation

• any concern on upward drift in long-term inflation expectations

• any hint that the Fed is beginning to focus on tightening as the most likely next significant policy move

• any repetition of Treasury Secretary Geithner’s strong dollar declaration even if it would be as limited as his first

Let’s see.

ThSM