For the most part, today's FOMC decision is expected to be a non-event, if indeed Jon Hilsenrath is still the proper "distribution" venue for the Fed, with Bernanke expected to focus on "communicating" clearer. There is of course the chance that the Fed has finally realized that the only successful Fed announcement, is that which surprises the market, and in the off chance it wishes to clean itself of allegations it is leaking news to the WSJ, and on the other hand indeed stun the market, there is that modest possibility the Fed may preannounce QE3 today, something which Bill Gross is actively preparing for, by loading up on MBS - the security that Citi expects will be monetized to the tune of $700 billion in 2012. Furthermore, SocGen is convinced the Fed will announce QE in a month, so will 30 days this way or that truly matter? After all, it is an election year... plus the hedge funds really need that year end rally, or else the closure of up to 25% of the underperformers will send shock waves within the rehypothecation conduit of Prime Broker shadow funding.
Here is the conventional wisdom FOMC consensus courtesy of RanSquawk:
Despite talk of various policy-easing options being considered at the Fed, the consensus remains that the central bank will refrain from major policy shifts and instead delay those decisions until its next meeting in January. Lately, the economic data from the US has remained upbeat – the University of Michigan Confidence rose to a six month high in December, while the latest trade deficit reading narrowed – which may provide the Fed room to wait until next month before considering further easing. Moreover, the outcome of the debate on extending a payroll tax cut and unemployment insurance is yet to be decided due to which the Fed won’t know how much fiscal drag the economy will be dealing with this year, and hence prevent it from clarifying its goals for unemployment and inflation in today’s meeting. The Eurozone debt crisis will likely weigh on US growth prospects and the financial system, however policymakers may be tempted to wait for further clarification on measures adopted by the EU leaders in a recent summit, together with impact of the coordinated action by various central banks to enhance liquidity in the global financial system.
The FOMC is expected to reiterate its stance of reinvesting principal payments from its holdings of agency debt in MBS and of rolling over maturing Treasury securities at auction. It is widely anticipated that one of the various moves by the Fed could be a large scale purchase of MBS, however the Fed is unlikely to opt for this option today as most housing market indicators have been positive in the past month. The Fed also has the option of changing the discount window, however it is unlikely to take this route until all other tools are exhausted.
Overall the reaction in the market is likely to remain muted if the Fed goes with the consensus of no major policy shifts. However, if the FOMC decides for additional purchases of MBS, the long-end of the yield curve will likely come under pressure. In the unlikely scenario of setting an explicit target on inflation, the USD-Index may come under selling pressure and strength is likely to be observed in T-Note futures.