What Will The Fed Do? – Predictions from The Mile [and beyond]


There’s half an hour to go before the FOMC policy announcement, which will be followed by ‘The Ben Bernanke Show’ from 1815 GMT.

You can Watch the Federal Reserve press conference with chairman Bernanke here:  http://www.ustream.tv/embed/4944768

Live video for mobile from Ustream
 

Predictions and polls have been cast; the vast majority of positions taken and wise bears would have capitulated, for now.

It’s rather too late for ‘clever’ predictions.

Still, it’s interesting to take a gander at forecasts and views of the Major Houses, for whom the Federal Reserve’s decisions are likely to create a lot of work this evening and beyond, whatever the Fed does.

I’ve pasted a few of these views below.

[Remember, details will be released on the NY Fed website 10 minutes after the announcement at 1630 GMT.]

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Greg Anderson, Foreign Exchange Strategist, CitiFX – Citigroup Inc.

“Based on our own private opinion polls and those we have seen in the public domain (WSJ June 15), we would now say that market expectations today are roughly the following: 60% – twist extension, 20% – QE3 and 20% – Nothing. We believe that expectations have coalesced in the direction of a Twist Extension over the past week or so. The higher expectation for Twist has taken away some of the expectation for Nothing as well as for QE3, with the benign outcome of the Greek election and subsequent risk rally being key factors in pushing QE3 believers toward the Twist camp.”

 

Sebastian Galy, Senior FX Strategist at Societe Generale

“We expect about $600bn of bond buying. Split 40/60 MBS/Treasuries, and sterilized through depos and reverse repos. The economic impact will be limited – the economy’s on a slow growth flight path whatever – but if they deliver I can go on being a yield-hungry, dollar-selling, carry-monkey for the rest of the month.”

 

Dennis Gartman, Editor/Publisher, The Gartman Letter, LC

“Do we expect to see the FOMC make another momentous decision at today’s meeting? The answer is, ‘No we do not.’ We expect, however, that the Fed will move to extend Operation Twist out for another year perhaps, although it may choose to lengthen it by an amorphous period. It may also choose to lengthen the maturities of the securities ‘twisted’ and it is possible that the Fed may increase the types of securities it will accept including agencies rather than merely choosing Treasury debt only.”


Ed Yardeni, President & Chief Investment Strategist, Yardeni Research, Inc.

“In any event, whatever the Fed does, it will be very lame. That’s because the raison d’être of the previous unconventional easing programs was to bring bond yields closer to zero. They are already there (Fig. 1). So what exactly would be the point of OT2 or QE3? If the FOMC votes for another round of easing today, the justification will be that the labor market remains weak, as evidenced by the latest JOLTS report. However, that begs the question of why another round of easing would work if the previous ones did not.”

 

Rabobank Financial Markets Research Strategists

“After the April meeting, we learned that employment growth has slowed down further, to below 100K per month. However, in his testimony to Congress on June 7, Bernanke did not appear to be very concerned. [Mr. Bernanke] acknowledged that there is an alternative, more troubling hypothesis. “But it may also be the case that the larger gains … were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed”. So the Fed has two hypotheses about the recent deterioration in economic data and probably prefers to wait and see how data evolve in the coming months to decide which hypothesis it believes to be true. Therefore, we do not expect the FOMC to announce a new asset purchase program tomorrow.”


Steven Ricchiuto, Chief Economist, Mizuho SUSA

“The combination of “Twist” and the Fed’s forward short-term rate guidance was intended to push rates down in the belly of the curve, while keeping long rates from backing up. Now the Fed will be looking for ways to push long rates down further in an attempt to boost housings. As such, QE3 has surfaced again. So has the speculation that the Fed will buy mortgages to directly help drive down the cost of housing. The possibility of lowering the interest paid on excess reserves has also resurfaced, as has the possibility of extending the forward guidance. This means that the Street will probably be disappointed by the results of the meeting, since aggressive speculation has replaced a cautious approach.”

 

Brown Brothers Harriman Economists

“While there continue to be calls from notable participants for QE3, it appears that most have come to the same conclusion we have. That is simply: an extension of Operation Twist, in some form or fashion, is more likely than renewed expansion of the Fed’s balance sheet by QE3.  The roughly 7.7% increase in the S&P 500 since the June 1 report of weak US employment data, was arguably helped by anticipation of Fed action.  Anticipation of Fed action may have also encouraged some dollar-negative position adjusting in the foreign exchange market.  There is some scope for a reversal of these actions after the FOMC decision.”


 Independent Strategy economists

“Our forecast is [that The Fed] will inch towards more quantitative easing (QE), but limit its comments to the potential for it down the road and more rhetoric about keeping interest rates lower for longer. However, assuming, as we expect, that the US labour market continues to disappoint, the Fed’s choice down the road is between ‘Operation Twist’ and unsterilized or sterilised QE. Given that the Fed’s holdings of short-term assets for use in Operation Twist are much diminished, it makes QE more likely. That is why it is worth understanding the difference between sterilised and unsterilized QE.”

Compiled by ThSM


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