The Federal Reserve's monetary policy meeting is expected to be uneventful this month, following the FOMC's announcement of open ended QE4 in December which would be finalized only when the unemployment rate falls below 6.5% or inflation accelerates above 2.5%.
The lack of action would also be justified by the fact that "the fundamental picture remains relatively unchanged," as Richard C. Lee points out. The analyst acknowledges that "pockets of the economy have improved over the last quarter" but nevertheless he believes that "the Federal Reserve will likely remain steadfast in its current policy direction for much of 2013."
Other analysts polled for the special forecast report agree with this opinion. Their projections are quite similar, with Yohay Elam suggesting that "rates will probably remain low until 2015, and less QE isn't due until 2014," Albero Muñoz predicting that "it's not very likely that we have any change in monetary policy through 2013" and Ilian Yotov saying that "the Fed will stay the course at its January meeting and quite possibly for the rest of the year."
According to Yohay Elam the FOMC will rather concentrate on the economic outlook and it "could acknowledge the ongoing slow recovery and the lower level of political uncertainty as positive factors, but without any hint on policy change anytime soon." Valeria Bednarik emphasizes however that if the members consider withdrawing QE gradually towards the end of the year we could expect "strong risk aversion rallies during the announcement, with dollar favored across the board."
The FOMC will release its monetary policy statement on January 30 at 19:15 GMT. Read below full forecasts of the contributing experts.
"The Fed has made it very clear that policy makers are committed to an open-ended QE until the unemployment rate falls below 6.5% or inflation exceeds 2.5%, so we know that QE is here to stay and that current conditions still 'warrant exceptionally low levels for the federal funds rate at least through late 2014.' In other words, the Fed will stay the course at its January meeting and quite possibly for the rest of the year. The greenback could come under pressure if the FOMC statement reminds the markets that the Fed's aggressive QE and record low rates are not going away anytime soon."
"The Federal Reserve is not expected to make any policy changes this time, after making a big move last time. The recent decision was dramatic: more open ended bond buying and a change in guidelines towards employment and inflation targets. While some members saw a potential easing in easing towards the end of the year, this does not reflect the dovish stance of most members, including Bernanke. If nothing surprising happens rates will probably remain low until 2015, and less QE isn't due until 2014.
The focus for this rate decision will be the view about the economy: the Fed could acknowledge the ongoing slow recovery and the lower level of political uncertainty as positive factors, but without any hint on policy change anytime soon."
"The fundamental picture remains relatively unchanged, even if pockets of the economy have improved over the last quarter. Still, the Federal Reserve will likely remain steadfast in its current policy direction for much of 2013, leaving no likelihood of a rate change this month."
"Rates will remain unchanged until 2014. Not looking for much from the Fed in Jan. Some members will still be talking about phasing out QE this year but that will be the minority and not the majority."
"With Bernanke and the FED committed to holding rates until 2015 what can they do? They have shown their hand and now have to play out the rest of their polices in line with the bold statement they made. In their defence there was not much else they could do, and still can do with respect to rates. In the US just like the rest of the world there was a need to ease consumer’s debt burden and try and stimulate spending and growth. I think we can all agree this did not have the desired effect, however it has brought some semblance of stability. I see very little chance of the monetary policy being eased, the US although having miraculously avoided the fiscal cliff, the underlying issues such as tax increases and cuts in the public sector spending still have to be addressed. Until we have the inevitable ‘too big to fail’ failure or a reversal in the positive trend in job and sentiment figures there will be a wait and see approach to any policy or rate decision the FED make. For me right now, no news is good news for the FED."
"In December, FOMC members announced that they would keep interest rates as low as currently as long as the unemployment rate remains above 6.5%, under the condition that inflation is not foreseen as accelerating above 2.5%. Based on members’ projections about the unemployment rate and inflation, this is consistent with low rates until mid-2015. That date is also the one pointed at by Janet Yellen a few months ago, when she exhibited the 'optimal control'rule, designed to minimise the deviation of the unemployment rate and the inflation rate from their natural rate or target. In short, the forward guidance was not changed, but instead of focusing on a date, it is now dependent on economic developments. There is no reason for FOMC members to be much more optimistic than they were in December. The fiscal cliff has been avoided and more recently, Representatives decided on temporarily suspending the federal debt ceiling. The occurring probability of tail risks dropped, but since they were just that, tail risks, their disappearance should have no effect on the central scenario. Rates will remain as low as currently until mid-2015, unless something else changes the Fed’s diagnosis. 2013 will not be about rate setting, but about enhancing the way the Fed communicates. It will likely make it clearer what kind of string of events would trigger a change in its policy. More specifically, after having spelled out what would lead to an increase in the Fed Fund Target, FOMC members could get more specific about what would make them slow and ultimately stop purchasing MBS and Treasuries."
"As it is the first interest rate announcement of 2013 it will be interesting to see how the new members of the FOMC impact on monetary policy. Charles Evans and Eric Rosengren are known doves, and this is likely to cause division amongst the ranks considering Bullard’s recent hawkish comments.
At the last Federal Reserve rate decision back in December it was agreed that interest rates would be tied to economic performance, specifically Unemployment and Inflation. However, this concept does not appear to be agreeable to all voting members. Federal Reserve Bank of St Louis President James Bullard has stated publicly that the he is 'nervous' of over-committing to easy monetary policy.
The minutes of the last meeting show the Fed was divided in opinion with regards to when to conclude asset purchases, and with the influx of new voting members this is unlikely to change. For this reason I am of the opinion that monetary policy will not be modified in anyway at the January meeting.
However, the Labour Department recently reported that slow and steady hiring has resulted in falling unemployment rates across the U.S. 25 of the states now have an Unemployment Rate below 7%, with some of the hardest hit states showing solid gains as well. For this reason I expect the labour market will continue to improve at a similar rate seen over the past 2 year, consequently bringing the overall Unemployment rate to around 7% or below by year end. As a result I believe we will see some scaling back in asset purchases, and a gradual move toward tighter monetary policy, but not until the beginning of 2014."
"After the introduction of QE3+ (the additional 45 bln USD monthly bond buyback) I expect the Fed to stay on hold on its upcoming meeting. There is not much space for another round of quantitative easing so monetary policy will not be changed. I also do not expect the Fed to change its inflationary forecasts. For any action from Bernanke we have to wait till the U.S solves its biggest issue right now – the fiscal cliff problem. That was put on hold but soon decisions will be made. I believe the Fed is also waiting for the outcome of the talks between Democrats and Republicans."
"We anticipate the wording of the statement expected at around 20:15CET on Wednesday, 30 January 30 will be little changed overall. The Committee will note the above-mentioned conditions. It will recap the reasons for the current asset purchase programs and very probably affirm them at the current size and scope of open-ended buys of $40bn in Agency MBS and $45bn in US Treasury’s a month. It will stress its vigilance on changes in conditions and careful assessment of the potential risks of this aggressive policy, but also the benefits to 'maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative'. It is highly unlikely there will be any adjustment in the newly established threshold for an unemployment rate of 6.5%, or that the Committee's statement will change the expectations that 'a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens'."
"The FED has set clearer parameters during its last meeting, in regards of the extension of the facilities programs, attached now to an unemployment rate of 6.5%. Therefore, I don't expect them to modify their actual economic policy. However, if the idea of starting pulling facilities back by the ends of this year sound louder, I would expect strong risk aversion rallies during the announcement, with dollar favored across the board."
"The Fed has actually committed to keep the federal funds rate near historic lows until late 2014 so it's not very likely that we have any change in monetary policy through 2013. Therefore, while long-term inflation expectations remain stable and the economy keeps creating jobs, the Fed won't make any move in interest rates during this year."
The lack of action would also be justified by the fact that "the fundamental picture remains relatively unchanged," as Richard C. Lee points out. The analyst acknowledges that "pockets of the economy have improved over the last quarter" but nevertheless he believes that "the Federal Reserve will likely remain steadfast in its current policy direction for much of 2013."
Other analysts polled for the special forecast report agree with this opinion. Their projections are quite similar, with Yohay Elam suggesting that "rates will probably remain low until 2015, and less QE isn't due until 2014," Albero Muñoz predicting that "it's not very likely that we have any change in monetary policy through 2013" and Ilian Yotov saying that "the Fed will stay the course at its January meeting and quite possibly for the rest of the year."
According to Yohay Elam the FOMC will rather concentrate on the economic outlook and it "could acknowledge the ongoing slow recovery and the lower level of political uncertainty as positive factors, but without any hint on policy change anytime soon." Valeria Bednarik emphasizes however that if the members consider withdrawing QE gradually towards the end of the year we could expect "strong risk aversion rallies during the announcement, with dollar favored across the board."
The FOMC will release its monetary policy statement on January 30 at 19:15 GMT. Read below full forecasts of the contributing experts.
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
"The Fed has made it very clear that policy makers are committed to an open-ended QE until the unemployment rate falls below 6.5% or inflation exceeds 2.5%, so we know that QE is here to stay and that current conditions still 'warrant exceptionally low levels for the federal funds rate at least through late 2014.' In other words, the Fed will stay the course at its January meeting and quite possibly for the rest of the year. The greenback could come under pressure if the FOMC statement reminds the markets that the Fed's aggressive QE and record low rates are not going away anytime soon."Yohay Elam - Analyst at Forex Crunch:
"The Federal Reserve is not expected to make any policy changes this time, after making a big move last time. The recent decision was dramatic: more open ended bond buying and a change in guidelines towards employment and inflation targets. While some members saw a potential easing in easing towards the end of the year, this does not reflect the dovish stance of most members, including Bernanke. If nothing surprising happens rates will probably remain low until 2015, and less QE isn't due until 2014.The focus for this rate decision will be the view about the economy: the Fed could acknowledge the ongoing slow recovery and the lower level of political uncertainty as positive factors, but without any hint on policy change anytime soon."
Richard C. Lee - Forex Analyst at FXstreet.com:
"The fundamental picture remains relatively unchanged, even if pockets of the economy have improved over the last quarter. Still, the Federal Reserve will likely remain steadfast in its current policy direction for much of 2013, leaving no likelihood of a rate change this month."Kathy Lien - Managing Director at BK Asset Management:
"Rates will remain unchanged until 2014. Not looking for much from the Fed in Jan. Some members will still be talking about phasing out QE this year but that will be the minority and not the majority."Steve Ruffley - Owner of Tradermaker.com:
"With Bernanke and the FED committed to holding rates until 2015 what can they do? They have shown their hand and now have to play out the rest of their polices in line with the bold statement they made. In their defence there was not much else they could do, and still can do with respect to rates. In the US just like the rest of the world there was a need to ease consumer’s debt burden and try and stimulate spending and growth. I think we can all agree this did not have the desired effect, however it has brought some semblance of stability. I see very little chance of the monetary policy being eased, the US although having miraculously avoided the fiscal cliff, the underlying issues such as tax increases and cuts in the public sector spending still have to be addressed. Until we have the inevitable ‘too big to fail’ failure or a reversal in the positive trend in job and sentiment figures there will be a wait and see approach to any policy or rate decision the FED make. For me right now, no news is good news for the FED."Alexandra Estiot - Senior Economist at BNP Paribas:
"In December, FOMC members announced that they would keep interest rates as low as currently as long as the unemployment rate remains above 6.5%, under the condition that inflation is not foreseen as accelerating above 2.5%. Based on members’ projections about the unemployment rate and inflation, this is consistent with low rates until mid-2015. That date is also the one pointed at by Janet Yellen a few months ago, when she exhibited the 'optimal control'rule, designed to minimise the deviation of the unemployment rate and the inflation rate from their natural rate or target. In short, the forward guidance was not changed, but instead of focusing on a date, it is now dependent on economic developments. There is no reason for FOMC members to be much more optimistic than they were in December. The fiscal cliff has been avoided and more recently, Representatives decided on temporarily suspending the federal debt ceiling. The occurring probability of tail risks dropped, but since they were just that, tail risks, their disappearance should have no effect on the central scenario. Rates will remain as low as currently until mid-2015, unless something else changes the Fed’s diagnosis. 2013 will not be about rate setting, but about enhancing the way the Fed communicates. It will likely make it clearer what kind of string of events would trigger a change in its policy. More specifically, after having spelled out what would lead to an increase in the Fed Fund Target, FOMC members could get more specific about what would make them slow and ultimately stop purchasing MBS and Treasuries."Nicky Ong - Co-Founder of Traders Corner:
"As it is the first interest rate announcement of 2013 it will be interesting to see how the new members of the FOMC impact on monetary policy. Charles Evans and Eric Rosengren are known doves, and this is likely to cause division amongst the ranks considering Bullard’s recent hawkish comments.At the last Federal Reserve rate decision back in December it was agreed that interest rates would be tied to economic performance, specifically Unemployment and Inflation. However, this concept does not appear to be agreeable to all voting members. Federal Reserve Bank of St Louis President James Bullard has stated publicly that the he is 'nervous' of over-committing to easy monetary policy.
The minutes of the last meeting show the Fed was divided in opinion with regards to when to conclude asset purchases, and with the influx of new voting members this is unlikely to change. For this reason I am of the opinion that monetary policy will not be modified in anyway at the January meeting.
However, the Labour Department recently reported that slow and steady hiring has resulted in falling unemployment rates across the U.S. 25 of the states now have an Unemployment Rate below 7%, with some of the hardest hit states showing solid gains as well. For this reason I expect the labour market will continue to improve at a similar rate seen over the past 2 year, consequently bringing the overall Unemployment rate to around 7% or below by year end. As a result I believe we will see some scaling back in asset purchases, and a gradual move toward tighter monetary policy, but not until the beginning of 2014."
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
"After the introduction of QE3+ (the additional 45 bln USD monthly bond buyback) I expect the Fed to stay on hold on its upcoming meeting. There is not much space for another round of quantitative easing so monetary policy will not be changed. I also do not expect the Fed to change its inflationary forecasts. For any action from Bernanke we have to wait till the U.S solves its biggest issue right now – the fiscal cliff problem. That was put on hold but soon decisions will be made. I believe the Fed is also waiting for the outcome of the talks between Democrats and Republicans."Bill Hubard - Chief Economist at Markets.com:
"We anticipate the wording of the statement expected at around 20:15CET on Wednesday, 30 January 30 will be little changed overall. The Committee will note the above-mentioned conditions. It will recap the reasons for the current asset purchase programs and very probably affirm them at the current size and scope of open-ended buys of $40bn in Agency MBS and $45bn in US Treasury’s a month. It will stress its vigilance on changes in conditions and careful assessment of the potential risks of this aggressive policy, but also the benefits to 'maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative'. It is highly unlikely there will be any adjustment in the newly established threshold for an unemployment rate of 6.5%, or that the Committee's statement will change the expectations that 'a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens'."Valeria Bednarik - Chief Analyst with FXstreet.com:
"The FED has set clearer parameters during its last meeting, in regards of the extension of the facilities programs, attached now to an unemployment rate of 6.5%. Therefore, I don't expect them to modify their actual economic policy. However, if the idea of starting pulling facilities back by the ends of this year sound louder, I would expect strong risk aversion rallies during the announcement, with dollar favored across the board."Alberto Muñoz - Forex Analyst at FXstreet.com:
"The Fed has actually committed to keep the federal funds rate near historic lows until late 2014 so it's not very likely that we have any change in monetary policy through 2013. Therefore, while long-term inflation expectations remain stable and the economy keeps creating jobs, the Fed won't make any move in interest rates during this year."
