Market Overview

Bernanke to Answer Questions Following FOMC Meeting


The Federal Open Market Committee (FOMC), the Federal Reserve's policy-setting body, is scheduled to meet on Tuesday and Wednesday of next week. At the conclusion of this two-day policy meeting, Fed Chairman Ben Bernanke will hold an unprecedented press briefing to answer questions about the central bank's decisions.

The FOMC is widely expected to hold the key policy rates near zero and to let the second round of its quantitative easing program (QE2) run its full course. The meeting also will include an update of the Fed's economic forecast, as well as a review of the most recent Senior Loan Officer Opinion Survey. While no change in either conventional or unconventional policy measures are expected to come from this meeting, investors will be looking for any changes in the language that could signal how and when monetary policy will be tightened.

The FOMC meeting will be preceded by a Board of Governors meeting on Monday to discuss the primary credit or discount rate. The Kansas City and Dallas Feds have been requesting a 25 basis point increase for more than a year, but no change is anticipated in the current 0.75% rate. Note that the Board usually does not announce its decision, if there is one, immediately following its meeting.

In his press briefing Wednesday, the Fed chairman is expected to confirm that QE2 will wrap up as scheduled on June 30. He probably will say again that the economy has shown signs of a self-sustaining recovery. But he is unlikely to indicate when the Fed will hike short-term interest rates to fend off inflation. Bernanke is expected to take a cautious approach to raising rates until he is sure that risks of deflation are minimal. Despite at least two inflation hawks on the FOMC calling for rates to rise right away, the chairman has plenty of support from other members. So the Fed will not make any big moves until Bernanke and his allies feel sure they are ready.

Bernanke told Congress last month, "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be fully established." While the unemployment rate has fallen from its peak at 10.2%, it remains well above normal recession highs. Given current trends, it may not fall to 8% until sometime next year. Perhaps then the Fed will clearly signal that short-term interest rates are headed higher.

On Friday, Chairman Bernanke will give the keynote luncheon speech at the 2011 Federal Reserve Community Affairs Research Conference in Arlington, Virginia. His comments are not likely to include discussion of monetary policy, though.


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