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16 Sep 2013
The Fed to maintain forward guidance with firm tone says Hilsenrath
FXstreet.com (San Francisco) - The Federal Reserve is struggling to justify extending forward guidance as part of its strategy to maintain the recovery path according to Fedwatcher Jon Hilsenrath in his latest article on the FOMC policy meeting.
The FOMC is expected to publish its interest rate and monetary policy decision on Wednesday September 18 and market is widely expecting the Fed to start its cut in the bond buying program. The Fedwatcher affirmed in his piece that "Federal Reserve officials face a communication challenge explaining their interest-rate plans when they gather for a policy meeting this week."
Their challenge is "how to justify the low interest-rate plan when their own estimates suggest an economy regaining its health." According to Hilsenrath, Fed forecasts could show "rates rising but still low" by 2016. The Fed also expects economy at "full employment" by the same year.
The decision on QE tapering the $85 billion-a-month bond-buying program is now a close call "on whether to start pulling back on the QE." The Fed is now changing its emphasis from bond buying to the "low-rate pledge."
As Adam Buttom from ForexLive says in a recent news, "the problem for the Fed is that forward guidance only works if it's firm. If the Fed switches its forward guidance now, the implication is that it can switch it any time. If they hike the threshold for inflation to 2.5% or unemployment to 7% this month, they can lower them next month. For the market, that takes away the Fed's credibility and forward guidance loses its power."
The FOMC is expected to publish its interest rate and monetary policy decision on Wednesday September 18 and market is widely expecting the Fed to start its cut in the bond buying program. The Fedwatcher affirmed in his piece that "Federal Reserve officials face a communication challenge explaining their interest-rate plans when they gather for a policy meeting this week."
Their challenge is "how to justify the low interest-rate plan when their own estimates suggest an economy regaining its health." According to Hilsenrath, Fed forecasts could show "rates rising but still low" by 2016. The Fed also expects economy at "full employment" by the same year.
The decision on QE tapering the $85 billion-a-month bond-buying program is now a close call "on whether to start pulling back on the QE." The Fed is now changing its emphasis from bond buying to the "low-rate pledge."
As Adam Buttom from ForexLive says in a recent news, "the problem for the Fed is that forward guidance only works if it's firm. If the Fed switches its forward guidance now, the implication is that it can switch it any time. If they hike the threshold for inflation to 2.5% or unemployment to 7% this month, they can lower them next month. For the market, that takes away the Fed's credibility and forward guidance loses its power."