Points which could come up at the Federal Open Market Committee Meet
Navi Mumbai, Maharashtra -- (SBWIRE) -- 09/17/2013 -- The Federal Open Market Committee (FOMC) is the policymaking body on monetary issues of the Federal Reserve System. The Chairman of the Board of Governors serves as the Chairman of the FOMC. The FOMC schedules eight meetings per year, one about every six weeks.
The Federal Reserve conducts monetary policy in order to achieve macroeconomic objectives of maximum employment and stable prices, while the FOMC conducts policy in response to changes in the economic outlook by adjusting the level of short-term interest rates. However, in order to improve financial conditions and to support the economic recovery since 2008, the FOMC has also used large-scale purchases of Treasury securities and securities that were issued or guaranteed by federal agencies as a policy tool in an effort to lower longer-term interest rates.
The Federal Reserve's next two-day FOMC meeting is scheduled to end on September 18. Fed officials intend to start rolling back (tapering) their $85 billion/month bond-buying program this year. The following are a few macroeconomic indicators the Fed would delve in, before arriving on a decision of tapering the monthly purchases of $45 billion worth of Treasury bonds and $40 billion worth of mortgage bonds.
October 2007 versus Q2 2013 for US Economy
Regular Gas Price: Then $2.75; Now $3.73
GDP Growth: Then +2.5%; Now +1.6%
Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
Americans On Food Stamps: Then 26.9 million; Now 47.69 million
Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
US Debt as a Percentage of GDP: Then nearly 38%; Now 74.2%
US Deficit (LTM): Then $97 billion; Now $975.6 billion
Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
US Household Debt: Then $13.5 trillion; Now 12.87 trillion
Consumer Confidence: Then 99.5; Now 69.6
S&P Rating of the US: Then AAA; Now AA+
10 Year Treasury Yield: Then 4.64%; Now 1.89%
NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares
In addition to above indicators, other factors could also delay the scale back. These include the weak August jobs report (please refer to above chart) or some "black swan" event like an escalation of geopolitical tension in Syria, leading the uncertainty to peak.
However, in spite of above all factors, economists across Wall Street agree with the scenario that the Federal Reserve is likely to announce later this month that it is tapering its monthly purchases. In fact, many Fed officials intend to start reducing bond purchases in order to acknowledge the decline in unemployment. However, they are cautious due to the falling share of Americans holding or seeking jobs. In addition, other labor market indicators too display persistent weakness.
One view gaining support among some Fed officials recently is of reduced monthly bond purchases, say $20 billion to $75 billion, and signal as loudly as possible. The next decision will then depend on more evidence or data on the job market improvement and inflation moving back toward 2% from its current low levels.
What’s unnerving to top Fed officials is the risk that investors will see a cut in bond purchases, as a sign they’ll start raising short-term interest rates. It should be noted that interest rates have been maintained near zero since late 2008. The Fed indicated that short-term rates will stay low, at least until the overall unemployment rate (indicated in black in chart) fall to 6.5%.
In line with this perspective, the Fed’s post-meeting policy statement and Mr. Bernanke’s remarks following it, are likely to emphasize that short-term interest rates will remain near zero until the jobless rate falls much further.
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