Tuesday, November 2, 2010

Tomorrow's FOMC meeting

The markets expect the FOMC to announce another round of asset purchases (QE2). The number that has been mooted is $500B, which would bring the balance sheet up from $2.2T to $2.7T or so. The market also expects the committee to say that it will go further if necessary.

What isn’t known is whether the FOMC will make a definite statement about inflation-targeting. To the extent that it is weak or vague, the market will react negatively (despite the midterms). If the language is more definitive and muscular, I’d expect the stock market to react very positively. The market would prefer no dissenters, and certainly no more than Hoenig.

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