Fed expected to keep monetary policy widely unchanged in December

The upcoming FOMC meeting, scheduled for December 13 at 19:15 GMT, should not bring any monetary policy changes. The Fed has already signalized it intends to maintain interest rates at the record-low level of 0.25 % until at least 2013, while an extension of the quantitative easing program seems to be moving away for now in the face of recent positive economic data.


"I think that the FOMC will remain on the sidelines once again," suggests Yohay Elam, who believes that the Fed will "wait till 2012 for new decisions." Other analysts contributing to the forecast report agree with his opinion because "the recent improvement in economic data from the U.S that we have observed certainly is a good sign," as Adam Narczewski points out, especially the considerable drop of the unemployment rate to 8.6% which according to Alberto Muñoz "will allow the Fed to wait and see before easing monetary policy further."

It is however important to remember that "40% out of 120 thousand jobs were added by retailers due to the holiday shopping season," reminds Sinan Saleh, so the unemployment rate might move back to the 9% region in the first quarter of 2012 and Adam Narczewski reasons that "another round of QE is still possible." We also cannot forget that should further escalation of the EU debt crisis occur, the US economy will be at risk and "still much depends on the market reaction to the Eurozone summit," argues Bill Hubard.

Read below the complete forecasts and opinions of the experts.

Yohay Elam - Analyst at Forex Crunch:

"I think that the FOMC will remain on the sidelines once again. There are a few members who support further easing, especially given the trouble in Europe, that may affect the US. But on the other hand, recent economic figures are still OK. The drop in the unemployment rate, the continued growth reflected in the PMIs and no threat of deflation all point to no further action.
Unless Europe melts down prior to the decision, Bernanke and his colleagues will likely leave policy unchanged in the last meeting of the year and wait till 2012 for new decisions."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"The Fed recently announced its involvement (along with other major central banks) in providing liquidity to the market by reducing interest rates on U.S dollar swaps and that was big news. I do not expect much from the FOMC on their last meeting this year. The recent improvement in economic data from the U.S that we have observed certainly is a good sign, on the other hand the situation on the markets is still tense. What certainly the the better than expected macro data did, was to lower the chances for QE3. Another round of QE is still possible of course, but if economic indicators keep showing at least stability (not mentioning improvement), any decisions or comments about QE3 will be postponed. At this moment though, monetary policy will not be changed by the Fed drastically. I would rather expect a fuzzy statement about the tough economy and the Fed having it’s eyes opened monitoring the situation closely."

Bill Hubard - Chief Economist at Markets.com:

"The recent data flow from the US has been reasonably encouraging; spending is up and some of the leading indicators are showing 'tentative' signs of improvement. This more positive story is likely to be underlined by a decent Q3 GDP growth figure of 2.0% q/q annualized, boosted by consumption and net trade. On its own, the US data is likely to further diminish the prospect of QEIII in 2011, but much still depends on the market reaction to the Eurozone summit.
The initial burst of NFP euphoria for last week’s employment data over a plunging unemployment (8.6% v 9.0%) quickly faded as the market came to terms with a less than ideal set of circumstances behind the drop. A 0.20% decline in the participation rate as workers left the labour force – ostensibly frustrated by a less-than-satisfying economic recovery – accounted for 50% the decline in unemployment. Therefore, we feel that the December FOMC meeting will have all the hallmarks of the November meeting which should be 'wait-and-see' what REALLY happens with the EU summit on December 8-9th."

Dr. S. Sivaraman - CEO and owner of i-knowindices.com:

"FOMC is expected to make announcement of policy decisions, the fund rate and statements on 13th Dec 19:15 GMT. The market awaits for a trigger to make year-end moves. The market expects the Fund rate to be unchanged and looking for some indications about the plans to boost economy in light of recent positive economic data like NFP, lesser unemployment rate etc. FOMC is expected to make positive economic statements for the year-end and announce a rate hike during the first quarter of the new year. This indication may trigger a risk appetite move during year-end time. The monetary policy may not bring in more transparency, still market related triggers are expected to be announced during that time. The subdued reaction to NFP and the risk aversion move after the announcement on 02nd Dec may give an impression that there is lack of investor enthusiasm – the attribute may be double recession. But 2 days before NFP for the story of coordinated intervention the market spiked up and held the higher levels till NFP announcement time. Actually, the investors bought at higher levels after the intervention trigger. That resulted in profit booking and long liquidation moves after NFP. So all the attributes are short lived and new attributes are bound to shadow the earlier market sentiments and attributes from time to time.
This time FOMC statement is expected to give risk appetite trigger for the market – that may lead to a year-end rally on the upside in other majors."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"At the press conference following the last FOMC meeting, the Fed Chairman made it clear that all options are 'on the table', including a 'third round of securities purchases, extending the period of record-low interest rates or being more specific about when rates would rise'. Although the Fed could keep the door open to QE3, the recent resilience of the U.S. economic data, which rules out a double dip, makes an announcement of another round of quantitative easing less likely to come at the December 13 meeting. As far as the record low rates, the Fed has already made a commitment to keep the status quo at least until 2013. For the time being, expect a continuation of the Fed’s accommodative monetary policy with QE3 ready to be deployed in case future economic conditions and the EU debt crisis take a turn for the worst. The USD might be able to attract some bids if the Fed puts QE3 on the back burner."

Sinan Saleh - Analyst at ecPulse.com:

"Despite the huge drop in unemployment in November, yet I wouldn’t say this represents a major improvement in the labor market, since the drop was a result of declining labor force. The jobs report did include some positivity though, as the report showed an additional 72 thousand jobs were added in September and October. But the jobs report showed that nearly 40% out of 120 thousand jobs were added by retailers due to the holiday shopping season, which kicked off officially in November, and whether retailers will keep the jobs beyond December remains to be seen. As far as I’m concerned nothing really changed in the outlook, since the recovery seems to be picking up some pace recently, and that should provide some optimism among the Fed members. Nonetheless, the effects of the European debt crisis are still unclear, and the level of uncertainty remains very high.
Accordingly, I don’t expect the Fed to change their communications during the coming meeting, since the discussions that were held during the last FOMC meeting signaled that the Fed members agreed that it wouldn’t be a wise decision to change anything under the current conditions due to the uncertainty in Europe. Although when overall conditions stabilize the Fed could increase their transparency by communicating specific targets for inflation and unemployment."

Alberto Muñoz - Forex Analyst at FXstreet.com:

"US unemployment rate dropped to 8.6 percent, the lowest since March 2009, but we should take into account that this was partly due to 315,000 people leaving the labor force. Anyway the Federal Reserve expected that the unemployment rate would likely average 9 percent in the fourth quarter so probably this unexpected improvement will allow the Fed to wait and see before easing monetary policy further. Anyway when people return to the job market in the next months, it's very likely that the unemployment rate will move back to 9 percent as long as growth remains unsustained and that the Fed will have to pull the Quantitative Easing trigger."

Valeria Bednarik - Chief Analyst with FXstreet.com:

"Believe it or not, FED’s main concern these days is not US growth, but European sovereign debt and how it may affect local banks. Fears of a liquidity crunch had lead the FED and 5 other major central banks to provide cheaper dollars around the world, cutting swaps past Wednesday, and generating an uncertainty environment that will probably persist for the rest of this year almost over. Won’t be surprised if the FED’s upcoming meeting points to overseas issues. When it comes to the internal economy, growth may be slow, but is there: QE3 is out of the table right now, while rates will likely remain unchanged as is too early to even consider rising them. Still I would expect next move to be so: a rate hike that will boost the greenback all across the board."

César Leiceaga - Independent Analyst with FXstreet.com:

"The recent positive economic data along with an unemployment rate drop to 8.6% will most probably slow down the FEDs bond buying programs and fixate more on explaining their outlook for the federal funds rate.
It`s in the FEDs interest to increase monetary policy transparency and regain the markets participants trust. According to recent polls, 41% of 1,097 investors surveyed believe that markets will perform better next year; this is the highest percentage of optimism in more than two years. Further transparency is a necessary measure to fuel optimism."
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