Finally, the moment you’ve all been waiting for has arrived! The first ever two-day FOMC meeting! Could this be the make-or-break moment for the U.S. economy? Read on to find out more!
That’s right folks, for the first time ever, Big Brother Ben Bernanke and the rest of the FOMC family will be holding the meeting over two days! Let’s not forget, Bernanke already bought more time at the last meeting, when his carefully chosen words didn’t exactly reveal which direction the Fed was leaning towards.
Still, I don’t blame him for wanting more time to discuss with his fellow eco-braniacs. This particular meeting is extra important, as the U.S. economy, for the lack of a better description, has been performing as poorly as Ben Affleck’s acting career. Yep, it’s that bad.
Don’t believe me? Just check out the latest employment figures! In case you forgot, we saw a big fat ZERO!
Even though zero meant that no jobs were lost, it also indicated that job growth is non-existent. In an economy like this, this is a big no-no. Just to point out how important jobs growth is, the NFP report has to print figures around 150,000 monthly over the next couple of years to bring employment back to pre-2008 levels!
Furthermore, it ain’t only Uncle Sam that’s struggling to make ends meet. Europe is still in the middle of a debt crisis and some market players believe that Greece may still end up defaulting. That’s right kiddos, a country that’s already received two bailouts may still default on their debt!
In addition, several European banks are holding bonds of other euro zone participants. A default from any of these countries could send the European banking system into a vicious downward spiral.
With economies on both sides of the Atlantic slogging their way to prosperity, the outlook for a global recovery looks bleak.
Considering all these, what can happen in the upcoming Fed announcement?
The market doesn’t expect the Fed to make any changes with regards to benchmark interest rates, but the market is hoping something drastic emerges from the meeting so that the economic engine can begin chugging smoothly again. In other words, the market wants something huge, and they want it fast.
We don’t know what exactly the Fed will actually do, but here are a couple of options available to them:
1. Operation Twist. A couple weeks ago, I discussed the Operation Twist program. Basically, the Fed will first sell the short-term bonds it has and then use the money it gets from that to buy longer-term bonds. It will effectively extend the maturity of debts without printing more money.
2. Reduce the Rates on Excess Reserves of Commercial Banks. This is also something I have tackled before. Lowering the interest rates on excess reserves will encourage banks to lend more, creating more liquidity and placing more money in the hands of businesses and consumers. More money in circulation leads to increased economic activity.
3. Quantitative Easing 3. By now, I’m sure that nobody is a stranger to quantitative easing anymore. Quantitative easing involves printing new money and purchasing government securities to increase the money in circulation to stimulate growth
Of course, the wait-and-see approach is always available to the Fed. This choice will probably disappoint the market more than anything else.
As for the the potential price action of the Greenback succeeding the announcement, well, it’s hard to tell what will happen. There are so many unknowns and possible scenarios that taking a wait-and-see approach ourselves may actually be the best option.
Besides, as smart traders, we should know that having no position is also a position. Minimizing risk is sometimes the best thing to do. We may not earn anything, but we won’t lose anything either.
At the end of the day, we’ll have a better understanding of what’s driving the market, which will lead to better trading decisions in the next couple of days.