The Federal Open Market Committee, the Fed’s policy makers, meet on Tuesday and Wednesday this week and will issue a statement on Wednesday afternoon around 2 PM. As usual, both the fixed income and equity markets will be watching for some hint of things to come.
There is little doubt that the Fed will announce another round of tapering, reducing its monthly purchase of treasuries and mortgage backed securities by another $10 billion.
The bigger question is whether we will get any forward guidance on when the Fed funds rate might be raised. The Fed, along with central banks in the UK, Canada and other countries, in the last year or so has been giving clear signals about its future plans so that the market doesn’t over-react to policy changes. More recently the Fed found it necessary to revise its forward guidance when the unemployment rate came down faster and farther than expected.
Forward guidance is forecasting – first the Fed is forecasting what it will do if certain events take place. This shouldn’t be a problem since the Fed controls what it does. But, the forecasts are dependent on economic events and forecasting the economy is difficult, even for the central bank.
While the unemployment rate fell, the economy did not improve as expected and the guidance tied to the unemployment numbers had to be abandoned. Given these difficulties, one question is why was forward guidance even considered?