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Upcoming FOMC meeting - What to expect?

Upcoming FOMC meeting - What to expect?

16.9.2013 9:50

Larry Summers, one of the contenders for the succession of Ben Bernanke as head of the Federal Reserve withdrew Sunday from the race. According to the WSJ, Mr. Summers wrote a letter to the president saying “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately the interests of the nation’s ongoing economic recovery.” President Obama spoke to Mr. Summers by telephone and said afterwards that he accepted Mr. Summers’ decision. Summers was one of the top contenders for the job and apparently the favourite of Mr. Obama,but he lacked support from key Senate democrats and so president Obama would have been in a difficult situation if he nominated Summers for the job, a battle he probably didn’t want to start, as his political capital has recently dwindled by his treatment of the Syrian issue.

The retreat from Summers likely opens the road for the nomination of Ms. Yellen, current vice chairwoman of the Fed and also part of the democrat movement, as the next Fed chairman, even if there are still other candidates on Obama’s short list.

Ms Yellen has been a co-architect of the current Fed policy and would thus represent the continuity of policy. She is known as a safe pair of hands and has a dovish posture. So, the withdrawal of Summers should be a bond positive event, which is reflected overnight with a 1 point jump higher of the US T-Note future.

Of course, ultimately, economic developments will decide the path of monetary policy, also if Ms Yellen is at the helm of the Fed, but we admit that she is more likely to try to keep the official rate low for longer.

The FOMC meeting will conclude on Wednesday with the usual statement, the publication of the economic and rate projections and a press conference by chairman Bernanke. All three have the potential to affect markets. The decision about the start of the tapering of the bond purchases is the key issue of this meeting. We still believe that the tapering will start, but slowly via a reduction of the monthly amount of purchases by $15B to $70B. Consensus is for a $10B reduction. Market reaction won’t differ much in both cases.

Of course, if the Fed postpones a decision, it would support core bonds, even if in a longer term perspective it increases uncertainty.

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