BofA Merrill Lynch Global Research A US Economics Report – Monday, 18 March 2013
Bernanke’s press conference will be key
We expect little change to the FOMC statement at this meeting, with both the current pace of asset purchases ($85 bn per month) and the thresholds on forward guidance unchanged. That said, revisions to the economic projections are likely to appear hawkish given the better US data of late. Thus, in our view the key will be Bernanke’s press conference at 2:30 PM on Wednesday, March 20. Based on his recent speeches and testimony, we expect on net dovish remarks that support our expectation for QE3 to continue well into next year.
Tug-o-war: data vs. downside risks
The statement may be revised modestly to reflect two offsetting changes since the last FOMC meeting. The better US data of late should convince the Fed that the economy has resumed growing after the temporary pause noted in January. Conversely, several of the downside risks feared by Fed officials have intensified: the sequester was not averted, news from Europe has been disconcerting (Italian elections and Cyprus bailout), and Chinese data have softened. The net effect is likely to be no change in either the QE purchase pace or the forward guidance.
Revised projections hawkish at first glance
The mix of good and bad news should increase the dispersion of Fed officials’ growth forecasts, especially for this year, but should still leave them well above consensus for now. Meanwhile, the better jobs data are likely to lead to lower unemployment rate projections for this year and next. The risk is that the market will thus strengthen its expectation that QE3 will be scaled back this year. Conversely, we think that the market is placing too much weight on the hawks, and that the Fed will be hard pressed to discuss ending QE3 should it yet once again have to downgrade its growth forecasts by mid-year.
Dovish comments expected at press conference
A further caution against expecting QE3 to wind down this year should come from Chairman Bernanke’s press conference remarks. We expect a repeat of several themes from recent speeches and testimony: the benefits of QE outweigh the costs; the costs of ending prematurely are high; the labor market is still far from “substantially improved;” the Committee has a number of tools to address any potential costs should they become noteworthy. We expect the majority of the FOMC to support the current policy stance (with just George again dissenting).
On the future of asset purchases
The January minutes indicated that the Committee and Fed staff will be reviewing the asset purchase plans at this meeting. We likely won’t see much of this debate until the minutes are released in three weeks time. Some expect a revised exit strategy statement, which is possible but more likely later this year. More notable, and probable, is incorporating participant views on the evolution of the balance sheet as part of the Summary of Economic Projections.
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