Not only is the Fed making a statement on Wednesday, we'll also hear what America's central bank has to say about the expiration of its second Quantitative Easing program (QE2) this month. The question is, does the Fed think they've done enough, or could we hear some hints of some QE3 coming our way?
In their FOMC statement last May, the Fed members provided no surprises when they announced that they would be sticking to the plan to end its 600-billion USD QE2 program on June 30.
Moreover, the central bank also said that it expects high inflationary pressures to be temporary, and that employment is still a concern. Great one, Sherlock. On the day of the statement, the dollar weakened against its major counterparts like the euro and the yen.
Will the Fed change its tune this month? Since its last statement a few weeks ago, we've seen America's unemployment rate climb back to 9.1% while the NFP figure is still at alarming levels.
Even other economic data from the U.S. has sent mixed signals to market junkies. While reports like retail sales, housing starts, and CPI figures came in a bit stronger than what analysts expected, manufacturing and production figures like the Empire State and Philly Fed indices and even industrial production and consumer confidence data revealed significant weaknesses.
Given the poor data, we may also see the Fed to slash its growth forecasts for this year and for 2012. After all, Bernanke already mentioned in one of his speeches this month that U.S. economic growth has been "uneven" and "frustratingly slow." This was most probably an effect of the supply chain disruptions from the March 11 earthquake in Japan and the terrible weather in some parts of the U.S.
Despite the bearish tone, it's unlikely that the Fed would find it necessary to inject more stimulus in the markets. Besides, the recent threats to the U.S. economy are probably just temporary, right?
With that, Big Ben and his men might just decide to take the safer route and stick with their cautious monetary policy stance. It is likely that Wednesday's statement will contain the usual "exceptionally low" and "extended period" phrases that Fed policymakers have been passing out like In&Out burgers as they wait for the economic recovery to gather steam.
In any case, you can bet your bottom dollar, euro, or Vietnamese dong that traders will be keeping a close watch on the statement.
If Bernanke reassures the markets that an additional round of quantitative easing is no longer necessary, the U.S. dollar could have reason to rally. Not only would this convince market participants that the Fed is moving towards tightening its monetary policy, it could also restore confidence in the U.S. central bank.
Make sure your eyes and ears are glued to the tube during the actual FOMC statement on Wednesday 4:30 pm GMT!