All Eyes on the Fed

On Wednesday theFederal Reserve will conclude their most anticipated policy meeting in recent memory.  A majority of prognosticators are calling for a reduction in the monthly dollar value of the Fed’s $85 billion of Treasury and MBS purchases, with the exact number generally ranging from a $10 billion to $15 billion cut.  The first mention of this so called tapering occurred in May and caused a dramatic re-pricing of the interest rate curve.  Two other important pieces of information will be gleaned from the meeting- the forward guidance language used to describe future policy decisions and the individual forecasts of committee members for economic and financial data through 2016.  The individual forecasts will be an important insight into the view of the entire group, given that policy is set democratically, at a time when there remains uncertainty about who the next chairman will be.  Much of that uncertainty has been lifted as late yesterday Larry Summers withdrew his name from consideration for Federal Reserve Chairman.  This leaves Janet Yellen as the likely successor to Ben Bernanke.  Summers had been considered both the front runner for the job and a monetary policy "hawk,” meaning he would be more inclined to wind down quantitative easing.  Yellen is currently Vice Chair of the Fed and helped craft QE. Her nomination would be looked at as a positive for the bond market and is a contributing reason for the market rally this morning.  It is important to remember that even if the Fed does decide to taper, this in no way signals the end of accommodative monetary policy and expectations are for reinforcement of this outlook in the minutes, with the 6.5% unemployment rate and 2.5% inflation rate as guideposts for probable changes in that stance.  Other important indicators out this week include housing market data, industrial production and inflation.