Update 6/20/12: FOMC decides to continue Twist through end of year. From the FOMC statement:
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities.
As described by this CNN article, "the move was designed to boost lending and lower longer-term interest rates."
Based on Chairman Bernanke's press conference and the FOMC projections, Calculated Risk blog thinks Chairman Bernanke is paving the way for QE3 on August 1st.
The Fed's 2-day FOMC meeting will be finishing up on Wednesday. The FOMC should be releasing its statement early Wednesday afternoon followed by its summary of economic projections and a press conference by Chairman Bernanke. I won't be able to post on the results until late Wednesday (I'll update this post). In the mean time, you can use this post and the comments to stay up-to-date on the outcome. The FOMC statement and economic projections will be available at this Federal Reserve FOMC page, and I'm sure the Calculated Risk blog will be posting on this news.
I think the best we can hope for is that the committee decides not to act with any new accommodation. Unfortunately for savers, analysts are predicting more stimulus. This post at FT Alphaville provides an interesting decision tree that Credit Suisse published in its attempt to predict the Fed. It's giving the probability of more easing at 80%, and it lists 3 types of easing:
- Operation Twist Extension is given the highest probability at 60%.
- QE3 is only given a 15% probability
- Other is given only a 5% probability. This includes extending the commitment language. That's the language in the statement that reads "the Committee ... anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014".
I'm glad to see they're giving this commitment language extension such a small probability. However, after seeing how easily the FOMC decided to extend the language from mid 2013 to late 2014 in January, I'm worried that this may be a higher probability.
I've seen rumors of some new type of stimulus such as purchasing from the muni market by buying short-term state or local government debt. This is described in this post Should the Federal Reserve Go into the Muni Market? from the Next New Deal blog. Based on what I've seen from analysts, I don't think this is likely. This could help local governments reduce their budget cuts, but it would punish everyone who invests in muni bonds.
Not everyone thinks there's a good chance that there will be new policy decisions announced tomorrow. As this Business Insider post describes:
QE3 or more twist will have little impact in the current situation, and the Fed can pass the ball to the politicians’ court, especially as the “fiscal cliff” is getting closer. In this case, the dollar will strengthen across the board. Doing nothing at this meeting still leaves the door open for coordinated action or QE3 in the next meeting.
So if savers do get "lucky" with no action by the Fed on Wednesday, the luck may not last long. The next FOMC meeting is scheduled for July 31st to August 1st.