FOMC

Hello there,

Tomorrow begins the Federal Reserve’s two-day Federal Open Market Committee (FOMC) meeting. Many are wondering what the outcome will be.

You’ll remember that back in September, the Fed announced that it was going to delay tapering its bond-buying program–news that surprised many. After the announcement, we saw interest rates drop. Shortly thereafter, the government shut down, followed by the drama of the debt ceiling.

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Initially the Fed said they might begin tapering in December or January. Now there is talk that it won’t happen until later in 2014. We will look at reasons for this in a moment, but before we do, remember that with this program, also known as QE3 (Quantitative Easing–and it’s the third time the Fed’s done this since 2009), the Fed buys 85 billion dollars in mortgage bonds each month. This was put into place to help lower interest rates, especially for mortgages, to stimulate the economy.

A recent article from CNN Money discussed reasons why the Fed may wait to taper. One reason is due to the economic impact of the government shutdown and the potential debt ceiling issues. The immediate crises have been averted, but they will be revisited in January and February. A global economist for Bank of America Merrill Lynch had said during the shutdown that:

“Lingering uncertainty – let alone a fiscal accident – would raise the chances that the Fed does not taper until next year,” said Ethan Harris, global economist for Bank of America Merrill Lynch in a research note.

In an article from Business Insider, Vincent Reinhart, Morgan Stanley’s Chief U.S. Economist said that because of the government shutdown, readings made by the Fed on the economy will be skewed. He said:

“There is the direct drag on GDP from dropping out the hours not worked by furloughed employees, the indirect loss of businesses tied to the government, and the hesitation induced in the momentum of private spending from increased uncertainty and reduced confidence. Fed officials will not know how to disentangle these threads at the upcoming meeting.”

Another reason why some believe the Fed won’t taper before 2014 is because of the changes coming on January 31st when Ben Bernanke, chair of the Fed, steps down to be replaced by Janet Yellen. Also, a number of other positions within the Fed will see replacements. It is believed that with such big changes looming, the Fed will not want to make any moves right now or in the coming few months.

So, many economists are predicting that the FOMC meeting tomorrow probably won’t amount to much and that the Fed will keep interest rates where they are and continue to delay the tapering of QE3. We will find out soon enough.

On another day, we may delve into the ideas of those who feel the Fed will never be able to taper. To get you started thinking about that, here is a quote from Paul Ashworth of Capital Economics:

“There is a danger that the Fed has missed its window of opportunity. If it’s waiting for some degree of fiscal certainty, this really could turn into QEternity.”

[Sources: CNN Money and Business Insider]

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