This month we will most probably see some action at the FOMC monetary policy meeting as the Fed should provide support to the US economy in the face of Operation Twist expiring at the end of the year, the imminent fiscal cliff and the still unsatisfactory situation on the labor market.
"As the 'Operation Twist' program expires this month, there is a chance the Fed will extend the QE program," suggests Adam Narczewski and almost all of the analysts polled for the forecast report agree with this opinion. Only Alberto Muñoz and Valeria Bednarik are skeptical about such an outcome of the meeting and rather see the Fed remaining on hold this month. Alberto Muñoz sees an extension of the QE program unlikely "until politicians reach a deal on the 'fiscal cliff' issue."
Another issue which might be considered by the FOMC at the December meeting is a shift from the current forward-rate guidance, to an outcome-based guidance, which has already been discussed in the past months. It is not expected however that they will reach a consensus on this matter because, as Alexandra Estiot points out: "The pros and cons for an outcome-based guidance do not allow a clear-cut answer, and dissensions among the Committee will probably remain too large for an agreement to be reached."
The Fed will announce its monetary policy decision on 12 December at 17:30 GMT. Below you will find complete forecasts of the contributing analysts.
"Fed officials made it rather clear that they will not stop their purchases of long-term securities even if Operation Twist is set to expire at the end of 2012. As it is not possible to extend it – the Fed is soon to run out of short-term Treasuries – it will have to be replaced by outright purchases, resulting in a balance sheet expanding more rapidly than currently. Until recently, we were expecting the Fed to keep buying securities at the exact same pace.
However, James Bullard, the St. Louis Fed’s President who will be a voting member next year, declared in a recent interview with the Wall Street Journal that such an amount would probably be too aggressive. His own estimation is that monthly outright purchases of about USD 25 bn would be equivalent to the current USD 45 bn under Operation Twist. During the next meeting, FOMC members could thus go for such a decision. What is sure is that they will choose to do bigger rather than smaller. The fiscal cliff seems to weigh on the economy heavier as the end of the year is looming, meaning Fed’s officials will want to provide more support to the economy. As to amend the forward-guidance, we doubt that FOMC members will agree on spelling out something too specific. The pros and cons for an outcome-based guidance do not allow a clear-cut answer, and dissensions among the Committee will probably remain too large for an agreement to be reached. If they are to amend the wording of the forward guidance they will likely remain vague enough not to loose what is left of their discretion."
"As the 'Operation Twist' program expires this month, there is a chance the Fed will extend the QE program. It will not be as some expect though – that it will replace it on a one-to-one basis. Let’s remember that 'Operation Twist' extended the duration of the Fed bond portfolio while another QE round will extend the portfolio itself. Still, as there are many challenges ahead of us in 2013, the Fed might not wait with further easing. It will be easier for the Fed to justify another QE if it shifts to an outcome-based guidance. Then, the U.S central bank could be adding stimulus until projections would show the target will be achieved. What target? The Fed has not specified yet but probably it will not be an inflationary target, rather the Fed will look at the labor market and growth. So the upcoming meeting can be interesting as new things can be introduced as a Christmas present for investors."
"Assuming there is no instant deal regarding the fiscal cliff, we can expect more action from the Fed now that the elections are over. The FOMC is likely to introduce more monetary stimulus as the extension of Operation Twist nears its end. This could take a form of more outright monthly purchases of Treasuries (QE4 or QE-Infinity 2) in a scale of of $30-40 billion per month, in addition to the current program of purchasing MBS at the scale of $40 billion per month (QE3 or QE Infinity). Operation Twist will likely be retired.
The current dovish composition of the Fed can easily find negative signs concerning the US economy, and can ignore the positive signs. Officials are not satisfied with the employment situation: the participation rate is still low, and the unemployment rate including discouraged workers remains high, despite some improvements. While the impact of more monetary easing at this point is questionable, the Fed would probably prefer to do something when it has a chance. The end of Operation Twist provides a chance.
A change in the forward guidance has little chances now, as not enough time has passed since the previous decision. This will probably wait for the next meeting, which will already be voted by the new FOMC composition.
The impact on the dollar could be negative at first. Afterwards, we could see a 'buy the rumor, sell the fact' reaction."
"With the U.S. labor market not yet showing the desired consistent improvement and 'Operation Twist' expiring at the end of the month, the Fed will be likely to extend the program into 2013. This, of course, would be in addition to the open-ended QE, the size of which could also be adjusted during the new year, with more QE if economic conditions deteriorate and vice versa. Pressure on the USD will increase if the Fed pushes the QE pedal to the metal"
"Operation Twist expires at year end, and officials will need to decide at their December meeting whether to ramp up the QEIII programme, to make up for the shortfall. Under QEIII, the Fed has said it would buy $40bn in mortgage-backed securities per month until the outlook for the labor market improves substantially.
The 3 policymakers on Saturday gave no hint as to their views on what the Fed should do, although Evans has previously advocated for keeping asset purchases at a monthly rate of $85 billion, while Plosser has said he does not view Twist's expiration necessarily as tightening. Instead, the 3 debated the merits of adopting thresholds for inflation and unemployment as guideposts for policy. Fed officials have been discussing such plans for months, although few economists believe they will come to a decision in December. 'I'm terribly worried that we are asking too much of policy here," Plosser said, of the value of setting thresholds. "I'm worried that the strategies are going to sow more confusion than clarity.'"
FOMC members probably won't opt for an extension of the QE program to substitute Operation Twist as many US economic indicators have improved in the past weeks: unemployment rate is decreasing, GDP keeps growing and some indicators are showing that the economy is starting to recover slightly. Also the Fed won't activate any QE program until politicians reach a deal on the 'fiscal cliff' issue" 
"With Operation Twist coming to an end, market speculates the FED will take more forceful action in the last meeting of the year. Back in June, when they decided to extend OT they said they were 'prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions' without fueling inflation. Inflation is ok, but the US is far from a strong economic recovery, and even further away from the 'sustained improvement in labor market conditions' which leads to thing a new round of facilities will be announced pretty soon. The FED needs to spur growth, and while these last years' easing has proved not to be enough, there’s not much else they can do at this point, and with OT out of the table, they will likely take their chances to act. However, I would expect the FED to remain on hold this month and wait for 2013 to announce any new measure."
"As the 'Operation Twist' program expires this month, there is a chance the Fed will extend the QE program," suggests Adam Narczewski and almost all of the analysts polled for the forecast report agree with this opinion. Only Alberto Muñoz and Valeria Bednarik are skeptical about such an outcome of the meeting and rather see the Fed remaining on hold this month. Alberto Muñoz sees an extension of the QE program unlikely "until politicians reach a deal on the 'fiscal cliff' issue."
Another issue which might be considered by the FOMC at the December meeting is a shift from the current forward-rate guidance, to an outcome-based guidance, which has already been discussed in the past months. It is not expected however that they will reach a consensus on this matter because, as Alexandra Estiot points out: "The pros and cons for an outcome-based guidance do not allow a clear-cut answer, and dissensions among the Committee will probably remain too large for an agreement to be reached."
The Fed will announce its monetary policy decision on 12 December at 17:30 GMT. Below you will find complete forecasts of the contributing analysts.
Alexandra Estiot - Senior Economist at BNP Paribas:
"Fed officials made it rather clear that they will not stop their purchases of long-term securities even if Operation Twist is set to expire at the end of 2012. As it is not possible to extend it – the Fed is soon to run out of short-term Treasuries – it will have to be replaced by outright purchases, resulting in a balance sheet expanding more rapidly than currently. Until recently, we were expecting the Fed to keep buying securities at the exact same pace. However, James Bullard, the St. Louis Fed’s President who will be a voting member next year, declared in a recent interview with the Wall Street Journal that such an amount would probably be too aggressive. His own estimation is that monthly outright purchases of about USD 25 bn would be equivalent to the current USD 45 bn under Operation Twist. During the next meeting, FOMC members could thus go for such a decision. What is sure is that they will choose to do bigger rather than smaller. The fiscal cliff seems to weigh on the economy heavier as the end of the year is looming, meaning Fed’s officials will want to provide more support to the economy. As to amend the forward-guidance, we doubt that FOMC members will agree on spelling out something too specific. The pros and cons for an outcome-based guidance do not allow a clear-cut answer, and dissensions among the Committee will probably remain too large for an agreement to be reached. If they are to amend the wording of the forward guidance they will likely remain vague enough not to loose what is left of their discretion."
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
"As the 'Operation Twist' program expires this month, there is a chance the Fed will extend the QE program. It will not be as some expect though – that it will replace it on a one-to-one basis. Let’s remember that 'Operation Twist' extended the duration of the Fed bond portfolio while another QE round will extend the portfolio itself. Still, as there are many challenges ahead of us in 2013, the Fed might not wait with further easing. It will be easier for the Fed to justify another QE if it shifts to an outcome-based guidance. Then, the U.S central bank could be adding stimulus until projections would show the target will be achieved. What target? The Fed has not specified yet but probably it will not be an inflationary target, rather the Fed will look at the labor market and growth. So the upcoming meeting can be interesting as new things can be introduced as a Christmas present for investors."Yohay Elam - Analyst at Forex Crunch:
"Assuming there is no instant deal regarding the fiscal cliff, we can expect more action from the Fed now that the elections are over. The FOMC is likely to introduce more monetary stimulus as the extension of Operation Twist nears its end. This could take a form of more outright monthly purchases of Treasuries (QE4 or QE-Infinity 2) in a scale of of $30-40 billion per month, in addition to the current program of purchasing MBS at the scale of $40 billion per month (QE3 or QE Infinity). Operation Twist will likely be retired.The current dovish composition of the Fed can easily find negative signs concerning the US economy, and can ignore the positive signs. Officials are not satisfied with the employment situation: the participation rate is still low, and the unemployment rate including discouraged workers remains high, despite some improvements. While the impact of more monetary easing at this point is questionable, the Fed would probably prefer to do something when it has a chance. The end of Operation Twist provides a chance.
A change in the forward guidance has little chances now, as not enough time has passed since the previous decision. This will probably wait for the next meeting, which will already be voted by the new FOMC composition.
The impact on the dollar could be negative at first. Afterwards, we could see a 'buy the rumor, sell the fact' reaction."
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
"With the U.S. labor market not yet showing the desired consistent improvement and 'Operation Twist' expiring at the end of the month, the Fed will be likely to extend the program into 2013. This, of course, would be in addition to the open-ended QE, the size of which could also be adjusted during the new year, with more QE if economic conditions deteriorate and vice versa. Pressure on the USD will increase if the Fed pushes the QE pedal to the metal"Bill Hubard - Chief Economist at Markets.com:
"Operation Twist expires at year end, and officials will need to decide at their December meeting whether to ramp up the QEIII programme, to make up for the shortfall. Under QEIII, the Fed has said it would buy $40bn in mortgage-backed securities per month until the outlook for the labor market improves substantially.The 3 policymakers on Saturday gave no hint as to their views on what the Fed should do, although Evans has previously advocated for keeping asset purchases at a monthly rate of $85 billion, while Plosser has said he does not view Twist's expiration necessarily as tightening. Instead, the 3 debated the merits of adopting thresholds for inflation and unemployment as guideposts for policy. Fed officials have been discussing such plans for months, although few economists believe they will come to a decision in December. 'I'm terribly worried that we are asking too much of policy here," Plosser said, of the value of setting thresholds. "I'm worried that the strategies are going to sow more confusion than clarity.'"
Alberto Muñoz - Forex Analyst at FXstreet.com:
FOMC members probably won't opt for an extension of the QE program to substitute Operation Twist as many US economic indicators have improved in the past weeks: unemployment rate is decreasing, GDP keeps growing and some indicators are showing that the economy is starting to recover slightly. Also the Fed won't activate any QE program until politicians reach a deal on the 'fiscal cliff' issue" Valeria Bednarik - Chief Analyst with FXstreet.com:
"With Operation Twist coming to an end, market speculates the FED will take more forceful action in the last meeting of the year. Back in June, when they decided to extend OT they said they were 'prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions' without fueling inflation. Inflation is ok, but the US is far from a strong economic recovery, and even further away from the 'sustained improvement in labor market conditions' which leads to thing a new round of facilities will be announced pretty soon. The FED needs to spur growth, and while these last years' easing has proved not to be enough, there’s not much else they can do at this point, and with OT out of the table, they will likely take their chances to act. However, I would expect the FED to remain on hold this month and wait for 2013 to announce any new measure."
