Market participants are waiting in anticipation for the Federal Open Market Committee's rate decision on Wednesday.
The consensus largely expects that with rates currently set between 0.00% and 0.25%, the Fed will leave rates unchanged. The focus of the decision will thus be on the accompanying statement, which should provide insight into the central bank's intentions regarding the next phase of quantitative easing.
Ian Shepherdson, chief U.S. economist at HFE, also expects the Fed to "remain focused on the measures to provide the market with liquidity using its balance sheet."
According to Michael Feroli, an economist at JPMorgan, the most interesting aspect of the FOMC meeting will not be whether rates are cut, but rather if the Fed will begin to consider purchasing long-term securities.
"If such action -- purchasing Treasuries -- were costless to the Fed, the course for policy would be clear," Feroli wrote. "However, there are perceived costs. One of these is the uncertainty as to how to effectively conduct open market operations in longer-dated Treasuries."
Some economists suggest that the Fed will begin to seriously consider adopting an inflation target. The chance that the Fed will announce the adoption of an inflation target in Wednesday's policy statement is slim because such action would most likely require the approval of Congress.
Elsa Dargent, an economist at Natixis, said the Fed is concerned about deflation, as consumer and producer prices have sharply dropped in the past few months. Dargent said some board members believe that setting a target will help the Fed's credibility.
"I think there have been debates, but no consensus was seen in the minutes," she said of the Dec. 16 meeting, when the issue was a hot topic. "We'll have to look closer in the statement [this] week."
Oil inventories will be closely watched on Wednesday as well, as crude oil prices continue to seesaw. Analysts are expecting a 2800k increase in crude oil reserves following the previous 6100k gain. Gasoline inventories are expected to rise 1750k following the previous 6475k build. Distillate inventories are expected to decline by 1125k barrels after rising 790k in the prior week. Finally, refinery utilization is expected to contract 0.50% after falling 1.98% in the previous week.
All times in EST.
7:00 US MBA Mortgage Applications 23-Jan Prior: -9.8%
10:30 US DOE US Crude Oil Inventories W/E January 23 Exp: +2800K Prior: +6100K
10:30 US DOE US Gasoline Inventories W/E January 23 Exp: +1750K Prior: +6475K
10:30 US DOE US Distillate Inventory W/E January 23 Exp: -1125K Prior: +790K
10:30 US DOE US Refinery Utilization W/E January 23 Exp: -0.50% Prior: -1.98%
14:15 US FOMC Rate Decision Exp: 0.25% Prior: 0.25%
By Steve Stecyk and edited by Sarah Sussman
©CEP News Ltd. 2009
