While the majority of the market does not expect a definitive answer from this week’s Federal Open Market Committee meeting, members could give some indication as to when the Fed will ease off the bond-buying gas pedal.
The FOMC’s current forward guidance says an exceptionally low range for the federal funds rate will be appropriate as long as the unemployment rate remains above 6.5%. While inflationary pressures are a worry that could curtail aggressive Fed policies, inflation expections two years out are expected to be no more than a half percentage point above the 2% longer-term expectations.
Because of these trends, analysts predict that the FOMC could use this week’s meeting to discuss lowering, or expressing a clear willingness to lower, its 6.5% unemployment target.
"Our sense is that the FOMC is intent on divorcing the markets of the perception that the start of QE3 tapering should be viewed as a signal of impending monetary policy tightening through increases in the federal funds rate," explained analysts for Compass Point.
They added, "While the FOMC may change its forward guidance as part of this meeting, we view it as far more likely that a mention of the FOMC discussing the possibility of changing its forward guidance will be included in the minutes from this meeting which will be released on August 21."
Overall, the FOMC is not expected to alter its current asset purchases at this meeting, but the committee may discuss forward guidance on whether to alter its pace of purchases to reinforce the notion that tapering does not mean monetary policy tightening.