Economic Insights

Economic Insights

Not much to be expected from the Federal Reserve tonight

The FOMC Meeting tonight is one of the most important events this week because investors are keen to know what kind of measurement that the Federal Reserve (Fed) is going to take to improve the fading US economy and potential “fiscal cliff” that might happen next year.

Almost no one expects the Fed is going to be aggressive tonight, but the Non-Farm Payroll to be released this Friday will be crucial because the speculation on further stimulus from the Fed will rise again for the FOMC meeting in Sep. If the market misses the quantitative easing (QE3) announcement from Fed, they probably need to wait until early next year because the US election will be held soon. 100k jobs expansion will be the benchmark line this time.

From the chart below which shows that the jobs expansion in the US has slowed down reaching the lowest level since late 2010 when the QE2 was announced. Although many methodologies could prove that the current monetary policy is already pretty loose such as the “Taylor’s rule”, a lower inflation will be able to offer more room for Fed to act once the employment market is the main concern compared with price stability in Fed’s point of view

Source: BloombergClick the image to enlarge

Besides the Treasury bills (T-bills) or the Mortgage-backed Securities (MBS) that Fed can purchase, extending the ultra-low interest rate period and inventing some credit measures to boost the mortgage loan and small and medium enterprises (SME) loans could be the options, which are similar to the Bank of England’s (BOE) measure, or Fed continues its “verbal intervention” to limit the upside of the US dollar and push the benchmark yield lower.Source: BloombergClick the image to enlarge

On the other hand, given the sharply increased balance sheet, it reduces the possibilities for further expansion. Take note that in Fed’s June minutes, some members voiced out that a larger Fed presence in the asset markets especially in the money market may be at risk of causing deterioration in the functioning of these markets. Thus in my point of view, further aggressive policy from the Fed will be from more thinking and threshold that remains high might need further soft data to appear, and Fed will definitely need a thorough analysis on the future impact to be made by a larger added securities.

Toward the end of the year, I expect a higher possibility that the Fed would continue its “verbal intervention” to guild the further monetary policy. Also, by comparing the current rate and the Taylor’s rule, a negative spread suggests a relatively easing measure being taken at this time.


Source: BloombergClick the image to enlarge

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