by Calculated Risk on 1/28/2014 08:42:00 PM

I expect the FOMC to announce additional tapering on Wednesday. Merrill Lynch economists think the Fed will change their forward guidance soon, but probably not at this meeting:

The market widely expects the Fed to continue to taper by US$10bn at its January meeting, and we do not expect it to disappoint. This action would bring its purchase pace to US$65bn per month (US$35bn Treasuries and US$30bn MBS). Less clear is what the Fed intends to do with its forward guidance, particularly the 6.5% unemployment threshold. As the unemployment rate has been falling for largely the "wrong" reasons, we anticipate the FOMC will drop this threshold altogether, in favor of vaguer but more robust qualitative guidance on the broad labor market conditions that would warrant a rate hike. This change likely will be made at one of the next few meetings - possibly this week. More troublesome for the Fed is the persistently low inflation rate; we expect some strengthening of guidance to suggest that the FOMC will not hike rates until inflation is much closer to the Fed's longer-run 2% target. However, that language change may be more likely later this year.

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 2:00 PM, the FOMC Meeting Announcement will be released. No change in interest rates is expected (for a long time). However the FOMC is expected to reduce QE3 asset purchases by $10 billion per month at this meeting.