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Economic Highlights

June 19: Fed May Provide Clear Picture

 ZacksTrade Now

The optimistic mood in the market about the Fed over the last two days is showing up in pre-open sentiment for today’s session as well. But the mood may not last all day, particularly in the afternoon session after the Fed announcement and the Bernanke press event. Given the level of Fed-centric anxiety and anticipation in the market, it is perhaps reasonable to expect a roller-coaster ride the rest of this week, including today.
 
The prevailing market uncertainty is quite ironic given the Bernanke Fed’s transparency vows. The Fed has been fairly explicit in what it wanted to see in the economy before it would think about changing its low interest rate policy. They provided us with specific targets to that effect about inflation and the unemployment rate. For example, the Fed wants to see the unemployment rate drop to 6.5% from the current 7.6% before they would change their current near-zero interest rate policy.
 
But they never spelled out the pre-conditions for changing or rolling back the $85 billion a month bond purchase program. The only thing mentioned in that context was that they needed to see 'substantial improvement' in the labor market outlook. The Fed may have a definition of what amounted to ‘substantial improvement’, but they never cared to share that with the market. As a result, while some in the market believe that the labor market outlook has indeed substantially improved and no longer needed as much Fed support, others are not willing to concede that point yet.

We may not get much out of the post-meeting statement this afternoon, but the Bernanke press conference should help clarify matters. Consensus expectations are converging on the ‘taper’ coming through this fall. But Bernanke doesn’t have too long to articulate his exit vision, with his term at the Fed coming to an end in a few months time.

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