The WSJ’s Hilsenrath writes up what he is watching for at tomorrow morning’s (Sydney time) FOMC window.
My read (guess) of the runes: we will get an open ended asset purchase policy with an initial commitment that takes us out to January 2013 (a natural time to revise forecasts).
In the enlarged LSAP program, my guess is that the FOMC continues all twist-related buying and tops up their UST purchases a little with QE3. However, a large part of QE3 seems likely to be MBS buying.
The low rate pledge will move out a year to 2015, combined with either more strongly worded guidance or possibly a single unified set of fan-chart forecasts which make clear that the policy interest rate will remain low even if the economy outperforms the FOMC’s expectations by a decent margin.
The IOER rate will remain 25bps.
Market reaction: I am thinking that the expectations channel (higher inflation expectations) means we get a bear-steepener in rates. The USD weakens, equities and commodities rally; breakevens wider.
For Australia, the level of the AUD is becoming a problem. If it is ~1.10 by the time of the next board meeting, the RBA could cut just to take the pressure off … Notwithstanding the ‘risk rally’.