#FOMC news won’t push the plunger on any volatility bombs anytime soon.

The main new thing to focus on may be on the fact that inflation isn’t behaving.
The Fed may need to re-cast what it means by ‘inflation’ so that inflation can be made to look like it’s under control.

The key phrase on inflation in April was “Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.”

But core inflation is +1.5% y/y from 0.6% in October.
And six-month annualised core inflation is at 2.1% after hitting 0.3% early last year.

Overall it may be difficult for the Fed to hang on to the description of underlying inflation as being ‘subdued’ and there’s a chance ‘subdued’ will change to a description suggesting that the inflation rate is somehow in line with the Fed’s mandate.

The post-decision meeting statement is likely to note recovery has moderated somewhat in recent months.

What would be a surprise would be any hint that might encourage speculation about new easing measures – QE3, maybe – but this is the extreme outside chance, in my view.
At this stage there are no hot issues awaiting further clarification by the Fed.
[Did you find the above ‘hot’? No, I thought not!]

But Bernanke will also touch on the following topics [maybe not using the same wording!]:

  • Certainly only cranks expect rate/monetary guidance changes
  • Ditto the end of QE2 – it won’t carry on, and that’s been well-flagged
  • “Continued accommodation” last time is widely held to have signalled keeping low O/N rates for longer [or indefinitely].

One other thing that’s worth noting – as of April 5, the Fed Funds rate was expected to be above 50bps by January 2012, judging by Fed Funds Futures.
As of today, the market is pricing Fed Funds above 50bps by November 2012.
So in two and a half months, expectations of the first hike have been pushed 10 months into the future.
Whatever your level of pessimism/optimism, that’s a lot.
It does underscore the notion that the key risk to the market, albeit a medium-term one, is the date and the rate of unwinding of the ‘locked-down’ US dollar environment which prevails right now.

The decision’s at 1630 GMT. The press conference will be a little later.

That is all.


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