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Fed Announcement Should Not Change Outlook

David Becker
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Today investors will need to absorb an announcement from the FEd following the FOMC’s meeting. Despite Wednesday’s better than expected Advance Q2 GDP report, there should not be any surprises or significant changes in policy. The data is too fresh to make much difference for policymakers, but it will give the hawks on the Committee more ammunition with which to plead their case. Another $10 billion cut in QE purchases is universally expected, with the Fed expected to finish its buybacks in October with a $15 billion reduction.

Despite a likely hot debate over the policy stance, the statement is not expected to give anything away in terms of explicit timing of rate lift-off or specific strategies. About the only material change in the statement relative to June’s should be an upgrade to the economic outlook and labor market conditions, with a potential adjustment to the inflation statement too. Risk is that the Fed starts to adjust its forward guidance and the “considerable time” phrase with respect to keeping rates low. The FOMC will have to start signaling how it will handle its portfolio.

The markets are also seeing increased chance the Fed tightens sooner and more aggressively than is currently envisioned, but there isn’t likely to be any such indication today. The mostly likely first rate hike will take place in Q2, although the risk is that it is soon if data continues to point to a stronger U.S. economy. Friday’s payroll report will give another clue to the potential Fed action. Yields remain subdued which should give investors an idea of what the bond market is thinking, and with inflation relatively tame, the Fed should be in no rush to curtail economic growth.

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