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27 Jan 2014
Flash: Fed likely to taper another $10 bn on Wednesday – BAML
FXstreet.com (Barcelona) - The research team at the Bank of America – Merrill Lynch observed that the Fed will most likely taper an extra $10 billion in its meeting ahead in the week.
Key Quotes
"The market widely expects the Fed to continue to taper by US$10bn at its January meeting, and we do not expect it to disappoint. This action would bring its purchase pace to US$65bn per month (US$35bn Treasuries and US$30bn MBS). Less clear is what the Fed intends to do with its forward guidance, particularly the 6.5% unemployment threshold."
"As the unemployment rate has been falling for largely the "wrong" reasons, we anticipate the FOMC will drop this threshold altogether in favor of vaguer but more robust qualitative guidance on the broad labor market conditions that would warrant a rate hike. This change likely will be made at one of the next few meetings - possibly this week."
"More troublesome for the Fed is the persistently low inflation rate; we expect some strengthening of guidance to suggest that the FOMC will not hike rates until inflation is much closer to the Fed's longer-run 2% target. However, that language change may be more likely later this year."
"With the first meeting of the year, a new set of FOMC voters are in place. We expect a hawkish dissent for a faster taper from Dallas Fed President Richard Fisher, and additional hawkish or dovish dissents are possible this year. This meeting will also mark the last for Ben Bernanke as Fed Chair; Janet Yellen takes over on February 1. Overall, we anticipate continuity in Fed policy despite the change in personnel, and expect the majority of voters to support the current accommodative policy stance and a very gradual exit."
Key Quotes
"The market widely expects the Fed to continue to taper by US$10bn at its January meeting, and we do not expect it to disappoint. This action would bring its purchase pace to US$65bn per month (US$35bn Treasuries and US$30bn MBS). Less clear is what the Fed intends to do with its forward guidance, particularly the 6.5% unemployment threshold."
"As the unemployment rate has been falling for largely the "wrong" reasons, we anticipate the FOMC will drop this threshold altogether in favor of vaguer but more robust qualitative guidance on the broad labor market conditions that would warrant a rate hike. This change likely will be made at one of the next few meetings - possibly this week."
"More troublesome for the Fed is the persistently low inflation rate; we expect some strengthening of guidance to suggest that the FOMC will not hike rates until inflation is much closer to the Fed's longer-run 2% target. However, that language change may be more likely later this year."
"With the first meeting of the year, a new set of FOMC voters are in place. We expect a hawkish dissent for a faster taper from Dallas Fed President Richard Fisher, and additional hawkish or dovish dissents are possible this year. This meeting will also mark the last for Ben Bernanke as Fed Chair; Janet Yellen takes over on February 1. Overall, we anticipate continuity in Fed policy despite the change in personnel, and expect the majority of voters to support the current accommodative policy stance and a very gradual exit."