FOMC Statement: 4 Things to Watch Out for

Another FOMC statement is upon us once again. Are you ready for it? Here are four things you need to watch out for:

1. No changes to monetary policy?

Almost no one in the FX hood is expecting an interest rate hike nor any addition to the Fed’s liquidity program. The Fed‘s fund rate will be kept at 0.00%-0.25% and asset purchases will remain steady at 600 billion USD. So does this mean there’s no more QE3?

Yes. There’s no QE3…for now.

Remember that Fed Reserve Chairman Ben Bernanke also didn’t announce QE3 in the Fed’s FOMC statement for March. Heck, he even sounded quite hawkish then! However, the central bank head honcho soon shed his hawkish feathers for dovish ones.

In a latter speech, he hinted that the Fed will probably keep its easing measures in place and that QE3 is still a possibility. He may just pull off the same trick Wednesday.

2. Possible downward revisions in growth forecasts

FOMC members have resorted to announcing their forecasts for growth, inflation, and employment to align market expectations with theirs. Consequently, their forecasts have made market junkies all the more giddy for the FOMC statement.

Most expect the 2012 forecast for the unemployment rate to be revised down from the Fed’s January estimate of 8.2% to 8.5%. This is after the reading for March printed at the bottom of the Fed’s target range at 8.2%.

However, growth estimates for 2012 will probably still be seen to come in somewhere between 2.2% to 2.7%.

3. More downbeat remarks from Bernanke?

Lately, the U.S. has been churning out poor figures, highlighting the weak spots in the economy. For instance, manufacturing indices released last week revealed weaker-than-expected industry conditions as both the Empire State index and the Philly Fed index missed forecasts and posted downturns in manufacturing activity for April. Aside from that, the housing sector has also been suffering from worse-than-expected housing starts and existing home sales for the previous month.

Because of that, we might hear a few more dovish comments from Big Ben, who already spoke about the grim outlook for the U.S. jobs market the other week. If you’ve been keeping tabs on my recent articles, you’d know how Bernanke’s speech managed to crush the Greenback then!

With the Fed’s potential shift to a less optimistic stance, they could modify a few words in their policy statement, such as “expanding moderately” to “expanding at a modest to moderate pace” when referring to U.S. economic growth.

In light of the recent events in the euro zone, they might also omit the phrase “strains in the global financial market have eased” as Spain and Italy seem to be on the verge of a debt crisis as well.

4. What’s next for Operation Twist

Last but certainly not least, Fed policymakers might start discussing what they plan to do next after Operation Twist expires in June. Recall that Operation Twist involved the Fed selling 400 billion USD worth of short-term securities and buying up long-term ones in order to drag long-term interest rates down. In effect, this should stimulate borrowing and eventually boost spending and overall economic growth.

But now that the program’s expiry is fast approaching, the central bank could be ready to provide an assessment of Operation Twist’s effects and whether they’d need to implement further easing measures later on.

Although Goldman Sachs economist Andrew Tilton believes that the Fed would announce its decision on further QE during the April rate statement, other analysts think that policymakers would wait until the actual June meeting before deciding on additional stimulus.

What’s pretty clear for now is that several market participants will be keeping close tabs on the FOMC’s choice of words during their upcoming monetary policy statement and that this event could spark fireworks across the charts. If the Fed hints that QE3 is indeed a possibility, we might be in for a huge dollar sell-off so make sure you stay tuned as well!