By Maulik Mody
Markets rallied Monday as both stocks and bonds advanced ahead of the Fed’s policy meeting today. Although the Fed has said it will increase its securities portfolio, it is unlikely to initiate a second round of quantitative easing Tuesday. Significant changes to the policy statement indicating a bias towards policy easing can be expected. The Fed may outline their intentions of expanding its securities portfolio, but such a statement can tend to overstate what the Fed can achieve with quantitative easing. Although monetary policy is effective, it cannot address the root problem of the excessive leverage overhang that is slowing down growth, but it can surely buy time to work through that overhang and reach self-sustaining growth in the economy.
An important question can be why the Fed does not simply initiate its plans right now. The Fed could simply be waiting for the right time to act so as its policy measures have the most traction. The gist of the message will be that the economic growth is slow and unless incoming data before the next meeting shows acceleration, the Fed will have to declare an initiation of securities purchase in their next meet. Expect an initiation of a new round of large-scale purchases at the November FOMC meeting.
Stock markets fell at the start of the day ahead of the meeting. The S&P was seen a point lower at 1141. NASDAQ was 6 points weaker at 2349. Treasuries posted gains as the 10-Yr yield fell 3 bp to 2.67%.