Fed Getting Ready to Remove Security Blanket for Markets
Spring may be in the air, but the long winter is hardly over for the U.S. economy. So expect the Federal Reserve’s policy-setting committee to keep its hot-house approach in place for at least for one more meeting.
Though there’s virtually no chance the FOMC will change interest rates or key monetary policy language at its March 16 meeting, change of another sort is imminent.
Come March 31, the Fed is expected to have finished a year-long program involving the purchase of some one and a quarter trillion dollars of mortgage-backed securities, which has been widely credited with pumping up the housing market.
“There's a lot of anxiety about that,” says economist Ram Bhagavatula, managing director of the hedge fund Combinatorics Capital.
The big question is how much mortgage rates will rise and how quickly as a result, even if the central bank has kept the door open about reviving the program.
In some ways, it’s a first step in bringing some uncertainty back into the markets. (After all, the recent discount rate was ultimately written off as a mechanical move without any implications for liquidity or monetary policy.)
For now, that’s probably more than enough for the markets and in that context might be reason enough for the Fed not to tinker with the now legendary centerpiece phrase of its policy statement: "economic conditions…are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
That phrase, added to the FOMC statement in February 2009, has been something of a security blanket for investors.
Much like the Greenspan Fed did during a seven-month period in 2003-2004, when rates were then at the record low of 1 percent, economists expect a series of subtle yet telling changes in policy language to let the market down easy and telegraph the imminent arrival of a rate increase.
“We do have sort of a precedent," says long-time Fed watcher David Jones of DMJ Advisors.
source: cnbc.com
No comments:
Post a Comment