Ahead of the Fed

When the FOMC meets on Tuesday and Wednesday, January 25-26th, the
Committee will discuss developments in the intermeeting period from
December 14, 2010. The members will update their respective economic
forecasts, and help Chairman Ben Bernanke prepare for his upcoming
semi annual monetary policy testimony in February (not yet scheduled).

All the members of the Committee will have an opportunity to present
their individual views, but only 5 of the District Bank Presidents
will have a vote at the end of the meeting. William Dudley will vote
as President of the New York Fed which has a permanent voting seat on
the Committee. The next 4 in the voting rotation which will take place
at this meeting are Charles Evans of Chicago, Charles Plosser of
Philadelphia, Richard Fisher of Dallas, and Narayana Kocherlakota of
Minneapolis. It is quite probable that one (or more) of these voters
will register a dissent. In particular, Plosser has been critical of
the policy of Large Scale Asset Purchase, currently under way, and he
is widely expected to express his objections in his vote. However, a
vote in dissent does not change the fact of the majority decision,
whatever that may prove to be. I expect the Committee to maintain the
current policy of LSAP through the end of 2Q11 for the full $600
billion as announced November 3, 2010 (A list of dissenters appears as
an accompanying discussion).

The available data suggest that the recovery has not yet gained
sufficient momentum to start generating jobs faster. Since that was a
major objective in providing additional stimulus, the Fed is unlikely
to start pulling back on unconventional measures in the near term.

Nonetheless, the economic data in the intermeeting period have been
more upbeat. Inflation and inflation expectations have moved ever so
slightly higher, and are edging toward a less subdued outlook. The
labour market is beginning to show signs of fundamental sustained job
creation, albeit with still disappointing progress. Levels of
unemployment are staring to decline.

Overall, I anticipate a slightly more positive to the tone the
economic assessment in the statement when it is released at around
1915GMT on Wednesday, January 26th. There will probably be a little
extra emphasis on what Chairman Bernanke and Vice Chairman Janet
Yellen have said earlier in January in regard to the Fed's
"unwavering" commitment to price stability. There may also be some
additional language about the Fed's exit strategy for the balance
sheet, and the tools it intends to use to accomplish that exit. There
will likely be nothing new. The value will be in offering reassurance
and reinforcement that the Fed does have a plan, and that it will
execute it when the appropriate time arrives.

We will not have the results of the January Senior Loan Officer
Opinion Survey until after the FOMC meeting. The Committee will have
the report for its deliberations. I would anticipate that the report
will be released on Monday, January 31st at 1900GMT if the usual
pattern is followed. It seems probable that the report will offer
indications that credit markets have further normalized. If the
anecdotal evidence of the January 12th Beige Book is accurate, there
should be evidence of increased consumer loan demand and lending to
consumers, as well as for commercial and industrial loan activity. We
will know more exactly the thoughts of the FOMC when the meeting
minutes are published on Wednesday, February 16th at 1900GMT. This
will include the quarterly update to the Fed's forecasts. Recent
comments from a few Fed policymakers indicate that expectations for
growth in 2011 have taken a turn higher. It is likely that release of
the minutes and forecast will precede the Chairman's monetary policy
testimony.
Source: Fxstreet.com