The FED is Coming Up and the ECB is Done

The FOMC decision on Tuesday will be watched by investors and economists around the globe, although no new initiatives are expected. Operation Twist continues (ends at the end of Q2), the Fed prolonged their “conditional promise” to keep Fed funds rate unchanged till late 2014 at the previous FOMC meeting, making it unlikely the Fed would decide something else at this one-day meeting. The attention will go to the statement and the description of the state of the economy. Mr. Bernanke mentioned a new process called “Sterilization’ last week and perhaps we will get a bit more about that but it is not expected. Otherwise the Fed has become somewhat more optimistic on the labor market and what does it make of inflation?

For that we will need to wait on the FOMC Minutes that will be published in a late. However, the improving labor market is diminishing chances on another purchase program, even if such a plan might resurface fast if the economy would falter again. The FOMC meeting shouldn’t reveal much new information. But one never knows, they have been known to surprise the markets.

The ECB meeting had no lasting effect on bond trading. An initial stumble in the Bund was reversed later on during the press conference. The ECB staff forecast negative growth figure in 2012 (slightly above consensus), but a slow recovery in the following year. More interesting was a sharp upward revision of inflation (to 2.4% in 2012) and the fact the ECB sees it only below 2% in early 2013. This could possibly have to do with oil prices pushing petrol prices upwards. This suggests a possibility of lowering of rates is growing stronger.

Mr. Draghi was very pleased with the success of the 3-yr LTRO on which he detailed in length. It is unlikely another 3-year LTRO will be held, but he was cautious and didn’t rule it out altogether. Although, last week he referred to the procedure as a “non-standard non regular event”. It is obvious that following the LTRO’s the ECB will take time to examine its effects on the economy.

The ECB is also well aware that the time it bought by the LTRO may be squandered by banks and governments by relieving the market pressures. Now the ECB’s efforts will continue to put pressure on both to address their problems.

Mr. Draghi also devoted a lot of time to quash German fears that the non-conventional policy of the ECB is saddling the institution with too much risk. A view that is growing throughout financial circles.

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