by Calculated Risk on 9/12/2012 09:47:00 PM

From Tim Duy at EconomistsView: The Wait Should be Finally Over

With respect to the meeting tomorrow, I agree with Robin Harding at the FT on this point:

For me, the question of what the Fed will do is far less interesting – and far less in doubt – than how the Fed will do it. This will not be a pro forma repeat of previous actions. As Mr Bernanke’s speech shows, the Fed is trying to address grave concerns about the labour market. The crucial issue is whether and how they tie any action to the state of the economy.

I don't anticipate a lump sum QE announcement. I anticipate an open-ended commitment to regular purchases of securities, Treasuries and/or MBS, that can be scaled up or down in response to the economy. Wall Street may be initially disappointed by the lack of a big number, but over time I think markets will come to appreciate the greater impact offered by a regular commitment based upon economic outcomes rather than the arbitrary amounts and time lines of previous QE efforts.

As Harding says, how they tie the policy to the economy is key.

From Jon Hilsenrath at the WSJ: Four Things to Watch at Fed Meeting. Some excerpts:

–QE STRATEGY: Many investors expect the Federal Reserve to launch a new round of bond purchases, often called quantitative easing or QE. One big question is how the Fed would structure such a program.
...
–WHAT TO DO WITH TWIST: Officials must decide what to do about the “Operation Twist” program if they launch a new bond-buying program. The Fed is funding the Twist purchases with money it gets by selling short-term Treasury securities.
...
–COMMUNICATION: How the Fed describes its impetus for action, and its criteria for even more in the future, could matter a lot. Is it responding to a darkening outlook? Or has it decided to take more aggressive action because its patience with slow growth and high unemployment is running out and it has a new commitment to changing that?
...
–WHETHER TO LOWER ANOTHER RATE: The Fed now pays banks 0.25% interest on reserves they keep with the central bank. The Fed could reduce the rate it pays on reserves that aren’t required of banks (known as excess reserves) a little bit to try to give banks more impetus to lend.

On Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 370 thousand from 365 thousand.

• Also at 8:30 AM, the Producer Price Index for August will be released. The consensus is for a 1.4% increase in producer prices (0.2% increase in core).

• At 12:30 PM, the FOMC Meeting Announcement will be released. Additional policy accommodation is very likely. The FOMC might lengthen their forward guidance for the first rate hike to mid-2015 or later, and / or also launch an open ended Large Scale Asset Purchases(LSAP) program (commonly called QE3).

• At 2:00 PM, The FOMC Forecasts will be released. These include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections. Earlier I posted a preview with the June projections for reference.

• At 2:15 PM: Fed Chairman Ben Bernanke will hold a press briefing and discuss the FOMC policy decisions.
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