RTTNews - While there is little doubt that the policymaking arm of the Federal Reserve will keep its interest rate target unchanged on Wednesday, observers will pay close attention to the accompanying statement for any indication that the Federal Open Market Committee is revising its inflation outlook.
Amid record long-term debt sales on the bond market, the FOMC is faced with the task of addressing the long-term inflation outlook without appearing to prepare for a premature rate hike.
Chris Low, the chief economist at FTN financial, explains the delicate balancing act the FOMC must pull off.
The FOMC's big challenge is to try and stem the sell-off at the long-end of the bond market without driving short-term rates higher, he said in a note. They must convince investors they take inflation seriously and can prevent it without giving the impression a rate hike is imminent.
While the FOMC is likely to leave the federal funds rate target range between 0.00 and 0.25 percent, where it has been since December 2008, there is some uncertainty as to whether or not it will change its policy outlook in light of economic reports that appear to show a moderation of economic deterioration and some signs of stabilization.
The Fed is likely to acknowledge the apparent moderation, although it will likely re-issue its pledge to keep interest rates exceptionally low for some time, reiterating its pledge to do whatever it takes to make sure the economy is on a strong path to stabilization.
Peter Boockvar, equity strategist at Miller Tabak, noted the concern expressed by the European Central Bank in terms of the risk of inflation as a result of the tremendous amounts of liquidity the Fed has injected into the credit-starved markets.
The ECB has been less forthcoming in terms of accommodative monetary policy, remaining typically hawkish and concerned about being overly-stimulative.
Tuesday, ECB member Axel Weber noted this concern as the FOMC began its two-day meeting.
In likely a timing coincidence but ironic that its on the same day the FOMC begins its two day meeting, he says in a jab at the Fed, 'the past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset price bubbles,' Boockvar said in a note.
The analyst also noted the 70 basis point increase in the benchmark 10-year note since mid-March, as well as the 30 basis point increase in the 30-year fixed-rate mortgage.
We know the FOMC will talk about the economy getting less worse, but will they repeat that they expect 'inflation will remain subdued'? Boockvar mused.
Still, the statement is likely to be similar to that issued in April, when the FOMC cited a modest improvement in the economic outlook.
The April meeting revealed that the FOMC observed that the pace of economic contraction appeared to be slower than what was seen during the March meeting.
The economy has continued to contract, though the pace of contraction appears to be somewhat slower, the FOMC noted.
Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time, the statement read.
The Fed is also expected to leave the amounts associated with quantitative easing steady. In April, the Fed set a timeline for its purchase of longer-term Treasuries, first announced at the March FOMC meeting. The Fed will purchase $300 billion in longer-term treasury securities by autumn.
The main difference analysts are looking for is a way for the FOMC to address inflation concerns without sparking fear that they will raise interest rates prematurely.
The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments, the FOMC said in April.
The announcement is set to be released at 2:15 pm ET.
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