The US Federal Reserve is expected to hold interest rates steady at its two-day meeting this week, but market attention will be on new forecasts from the central bank, especially to so-called dot plot – which shows were members of the Open Market Committee see interest rates heading to in coming months and years.
The forecasts and dot plot are widely expected to show fewer expected rate rises and expectations of a slower economy.
The Fed also is likely to announce the end of its operation to unwind its balance sheet, but the key part of that statement will be when it will actually end the program.
A long slow end will be seen as bullish in that it will continue to support markets with an easy policy stance, while a quick end will be seen as bearish and a tightening of monetary policy.
US shares had their strongest week for three months or more last week – partly in the expectation that the Fed won’t be lifting rates any time soon.
US Treasury yields again fee with the yield on the key 10 year Treasury security falling below 2.60% Friday at 2.59%, its lowest yield since June 4.
The AMP’s Chief Economist, Shane Oliver reckons the Fed will leave interest rates on hold and “indicates that the pause will continue for some time yet.”
“But even more significantly it’s likely to make some reference to moving to a framework that targets average inflation over time with the implication that it will allow a period of inflation above 2% to make up for all the years below).
“…there is a good chance that it will indicate a tapering in its process of balance sheet reduction (or quantitative tightening) in the second half ahead of ending it early next year.
“All of this is likely to be taken as dovish by investment markets,” Dr. Oliver wrote at the weekend.