Today is all about the Fed Open Market Committee. We believe there is a zero chance that they raise short term interest rates, given rising unemployment and the fragile yet stabilizing state of the economy. The policy statement is another matter and one that we need to watch closely. The salient points that will draw attention are as follows;
- Overall state of the economy
- Continued purchase of MBS and Treasuries
- Unemployment Concerns
- Exit strategy
Number 4 is the one we want to watch out for. Rumor mill bantering is talking about the Fed using “Reverse Repos” to drain dollars out of the system, taking away excess reserves. In general, this exercise is nothing new if explained in the proper context to the market. If it is labeled a policy change, the market will feel that this is the beginning of a shift in policy, one towards tightening/removal of accommodation. English translation would means higher interest rates. This kind of shift would cause forced selling in both bonds and stocks and not treat us mortgage types well. We believe it is a little too early in the recovery cycle for this type of policy change, given our current level of unemployment along with a number of other fragile components of the economy. No doubt the Fed is walking a tight rope, trying to sound confident and optimistic while still keeping the training wheels on the economy. Pre-FOMC trade is quiet with both stocks and bonds slightly to the downside (Stocks off 20, MBS off 2/32’s). The fireworks will hit the screen at 1:15 pm cst so buckle up!