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Outlook on the Oct 29-30 FOMC meetings

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Outlook on the Oct 29-30 FOMC meetings

The Federal Open Market Committee will meet Tuesday for the second last time this year to discuss monetary policy. Although most economists expect the meetings to be non-eventful, market participants should monitor changes to the Fed’s official statement, as it could give important signals about future policy decisions.

Fed officials will likely point to diminishing downside risks to the economy when compared to a year ago, but this won’t be enough to begin scaling back the pace of monthly asset purchases. Slow job creation and the recent government shutdown are probably enough to warrant a continuation of QE3 without any changes. The US economy added 143,000 jobs per month on average in the third quarter, 39,000 fewer than the Q2 monthly average and 64,000 fewer than the monthly average between January and March. According to the S&P Ratings Division, the 16-day government furlough shaved at least 0.6 percent off national gross domestic product.

The focus on job growth will only increase when Janet Yellen takes over as Chairwoman of the Federal Reserve in February 2014. Under Yellen, the Fed will increasingly focus on the unemployment rate, payroll employment, hiring and quit rate to determine the pace of monetary easing. The ADP Institute is expected to release its estimate of employment change Wednesday. The official nonfarm payrolls report from the Labor Department will be released next week.

Market participants should pay attention to the Fed’s assessment of the current economic situation, and how it has changed since the summer. The partial government shutdown introduced new uncertainties, and is likely to create less favourable conditions for the US economy in the fourth quarter. According to an October survey of economists surveyed by Bloomberg, the Fed will wait until March to begin scaling back asset purchases. However, projections have been wrong before; the majority of economists expected September to be the month the Fed reigns in record stimulus.

The Federal Reserve will publish its FOMC statement Wednesday at 2:00 pm EST.

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