There's a lot of hype about what might be done or said in this month's meeting of the Federal Open Market Committee. The monetary policymakers meet for two days this week, concluding Wednesday afternoon. Frankly, all the anticipation surrounding this meeting is a little bit surprising: the Fed probably won't reveal much new.
Perhaps all the media excitement stems, not from what happens during the meeting, but from what will happen afterward: for the first time Chairman Ben Bernanke will hold a press conference. Although reporters might be excited to spew questions at the lead central banker, he won't reveal anything too juicy. Instead, the press conference will almost certainly be used to clarify what we already know from its official statements, not to reveal new information
At this time, there are five things to look for in the statement.
Fed Committee's Assessment of the Economy
Each meeting's statement briefly states how the Fed governors and regional presidents are feeling about the economy. For example, in March, the statement said that the economy was on "firmer footing," hiring was "improving gradually," spending "continued to expand," and despite commodity prices rising "longer-term inflation expectations have remained stable."
That sounds a lot like what the economy looks like currently. Really, little has changed since March. The economy continues to trudge slowly forward. Consumer sentiment has weakened somewhat since the last meeting in early March, but it's not clear that the economy has taken a turn in either direction.
But what we may also get on Wednesday is the FOMC's new economic projections. Usually, those do not come until the Fed provides its more detailed minutes a few weeks after the meeting. But the press conference is billed as an opportunity for Bernanke to explain the latest quarterly projections of the FOMC. So these projections will presumably be provided a little early.
Any Hints on the Current Monetary Stimulus Effort
Since November, the FOMC has been conducting a quantitative easing effort ("QE2") that consists of the Fed's purchase of $600 billion in longer-term Treasury securities. Every month since then, the Fed has reaffirmed its decision to keep the program going, purchasing somewhere in the ballpark of $75 million in Treasuries per month. Since nothing has materially changed in the economy since March, you can expect the Fed to stay the path. The Fed will say that it intends to keep the program going through June, as planned.
Any Hints on the Reinvestment Program
In addition to QE2, the Fed has also been reinvesting the cash it gets from maturing securities it owns in Treasuries. That's to the tune of between $15 and $25 billion per month. Up to now, the Fed has given no indication that it intends to rethink this strategy either. Doing so will likely be the first step in its exit, since ending reinvestment would finally allow the size of its balance sheet to begin to decline. Don't expect the Fed to indicate any intention of doing this yet, since its exit isn't expected to begin in the near-term.
Any Hints on Exit Timing
When might the Fed stop communicating that it intends to keep interest rates exceptionally low "for an extended period"? We might see that change later this year, but we probably won't see the language altered this month. The Fed's exit also involves a number of other tools, however. Might some of those be implemented in the near-term? It's somewhat doubtful that the Fed will be eager to start its exit while still expanding monetary policy, but we should look to see if any of those exit strategies are mentioned.
Any Hints on a New Monetary Stimulus
Finally, some in the market have already called for a QE3 -- additional monetary stimulus for when the current effort expires in June. Considering that job growth has picked up a bit since November and that deflation concerns have dissipated, it would be pretty surprising to see the Fed order another dose of quantitative easing. But it would be even more surprising for the Fed to announce such a program ahead of schedule. QE2 does not end until June, so the central bank could easily wait until its June meeting to announce QE3 to begin in July.
All this adds up to what may be a very anticlimactic Fed meeting. The only interesting component will likely be its new set of economic projections. Hiring has picked up a bit since January, so you might see more optimism expressed by the committee members. But it's pretty inconceivable that we'll see any significant changes to the path of monetary policy. Expect QE2 go remain in effect, interest rates to remain low for an extended period, and no mention of any concrete plans for QE3 or an exit.