Central Banks

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On Tuesday the Federal Reserve's FOMC begins a two day meeting. On Wednesday at 2:00 p.m. ET there will a FOMC statement issued. The Fed is not expected to change interest rates but investors will be looking for more detail of its plan to shrink its balance sheet and for further comment on inflation. 

Since Fed Chair Janet Yellen spoke before Congress and Senate market expectations have changed with her comments on inflation and more dovish outlook. The fed funds futures.market has a 40% chances of a December rate hike priced in. With have seen the US dollar fall in the past few weeks particularly against the Euro and the Australian Dollar. The Euro rose to 14 month highs despite a dovish ECB President Draghi and the Australian Dollar hit 2 year highs on expectations for a more hawkish RBA.

The line Yellen and other Fed officials have been pushing is the drop in inflation was transitory and the result of phone bills, Amazon buying wholefoods, prescription drugs and energy. In other words all the things main street is surviving on and enjoying on, Yellen and the stockmarket bulls don't want this. Be careful of unintelligent consequences Janet and the stockmarket bulls.

What to watch for is whether the Fed says inflation has declined further, the Fed is expected to continue to discuss growth as rising moderately. Look also if they change the language on employment to reflect the strong jobs report in June. Remember they do have a dual mandate of full employment and price stability.

Investors, particularly those long the stockmarket will look for the Fed commentary on its balance sheet. Will they change the paragraph describing balance sheet policy and the timing of balance sheet normalization?

The question is how fast the Fed is exiting it's quantitative easing program, that is how it replaces the U.S. Treasury and mortgage bonds on its balance sheet as they mature. The stated plan is to slowly reduce the amount of replacement fixed interest securities it is buying. Do they give a date or continue with doublespeak?

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