FOMC Minutes (September)
Minutes from September’s meeting will reveal a wide range of views on the FOMC regarding the timing of the central bank’s withdrawal of the monetary stimulus. Some policymakers have lobbied for the central bank to begin tightening aggressively soon. Others, including Fed Chairman Ben Bernanke, appear to want to proceed with caution.
Discussion of the Fed’s exit strategy will be interesting. At the September meeting, the FOMC decided to stretch its purchases of agency and mortgage-backed securities to March of next year. The Fed has already spent more than half the $1.45 trillion committed to these purchases. While it will be absent in the minutes, the Fed may have to increase its commitment in order to keep mortgage rates from rising and slowing improvement in the housing market, especially if the first-time homebuyer tax credit is not extended.
The minutes may show a discussion of whether or not to extend the Term Asset-Backed Securities Loan Facility, which is scheduled to expire at year’s end. Expect the central bank will eventually extend the program into next year as a safety net for commercial real estate. One caveat is that this program operates under Section 13.3 of the Federal Reserve Act, which will require it to be closed when conditions are no longer “unusual and exigent.”
Like the post-meeting statement, the minutes will have a dovish tone. Most policymakers don’t appear concerned about inflation, although they are watching expectations closely: If these begin to rise, the central bank may be forced to tighten. The core PCE, the central bank’s preferred measure of inflation, is noticeably below the Fed’s soft target of 2%.
Core inflation is a lagging indicator, typically slowing even after growth resumes. Expect the core PCE to weaken through the remainder of this year, before bottoming in mid-2010. This would be the slowest growth in the core PCE in the past 50 years. The minutes may further acknowledge recent improvement in the economy, hinting that the recession is over, although the recovery’s strength remains questionable. The equity arena will likely feed off of this in the near-term with a weak to neutral tone.
Contact Peter Greene for more information about institutional research & trading: