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The Federal Reserve is beginning a two-day meeting today in Washington. There’s little doubt that the Fed will continue with its low interest rate policies. All eyes will be on the policy statement which will come out tomorrow at 12:30, and once again, Bernanke will meet the press.

The words that everyone will be looking at are “extended period.” That’s how the Fed has described its commitment to hold interest rates very low. Once the words “extended period” leave, then you know something’s up. I think it’s very likely that “extended period” will be in tomorrow’s statement, and it will probably still be there by October at least. After all, the unemployment rate is still at 9.1%.

The bond market also knows what the deal is. Consider that from February’s high to the recent low, the yield on the 10-year Treasury has plunged 85 basis points. Not too mention that the U.S. stock market had shed over $1 trillion since late April.

However, the Fed is also facing a problem of inflation. I shouldn’t say that inflation is a problem yet, but it’s at the very edge of the radar screen. The most recent inflation report showed the largest price gains in four years. In a relative sense, this isn’t a high level of inflation but the Federal Reserve has two mandates—full employment and low inflation. Until now, the low inflation issue has been on the back-burner as the Fed has tried everything to help the economy get on to its feet.

Right now, I think it’s obvious that the Fed won’t touch rates for the rest of the year. At the end of this month, the Fed’s QE2 program will come to an end. Some folks are expecting a third round of bond buying. I don’t see that happening and I think the Fed has made it very clear to Wall Street that it’s not coming.

Source: Doesn't Look Like There Will Be a QE3