All Eyes On The Fed

All eyes are currently on the statement due for release later today at the end of the Federal Reserve’s Open Market Committee (FOMC) meeting.

The Fed is almost certain to hold the rate at record lows of between zero and 0.25%, but the market will mainly respond to the Fed’s outlook on the economy and whether it is considering any changes to its massive programs to purchase treasuries and mortgage-backed securities.

On one hand, interest rates have started to creep up leading to an expectation that the Fed may ramp up its purchases of treasuries and mortgage-backed securities to keep a lid on interest rates. But on the other hand, there are also expectations that the Fed may try to scale them back to avoid igniting any of inflation.

The Fed has plans to spend up to $300 billion to buy long-term government bonds, and so far it has bought about $177.5 billion in Treasury bonds. The Fed also plans to buy up to $1.25 trillion worth of securities issued by Fannie Mae (FNM) and Freddie Mac (FRE), of which about $456 billion worth of securities have been purchased.

Slowing down the purchases could help avert any possible market disruptions due to the Fed’s exit strategies once the economy rebounds, but could also hurt the prospects for an economic recovery. Chairman Bernanke expects the recession to end later this year and there have been signs of some improvements, but even after the recession ends the recovery is likely to be anemic, and unemployment will continue to rise for some time.

Till the statement is released and dissected, the market will keep guessing.

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