FT Alphaville " Other reactions to the FOMC Just a quick run-through here. Nomura: Today Chairman Bernanke and the Federal Open Market Committee (FOMC) did not indicate that they are actively considering another round of large-scale asset purchases (so-called "QE3"). Consequently, we are changing our call on QE3. We now believe that the appropriate base scenario is that the Federal Reserve will not carry out another round of quantitative easing following the completion of the Maturity Extension Program ("Operation Twist") in June. Some participants lowered their growth forecasts for 2013 and 2014, but some policymakers lowered their forecasts for the unemployment rate in those years as well. The lower projections for unemployment may suggest greater risk that the FOMC will have to raise rates sooner than currently expected even with moderately weaker forecasts for economic growth. In addition, some members of the FOMC marginally raised their forecasts for both headline and core inflation. Taken together, these conditions do not suggest the FOMC anticipates a weakening in the US economic outlook that warrants additional easing. In the policy statement, the FOMC characterized that the European situation "continue[s] to pose significant downside risks to the economic outlook," but Chairman Bernanke added in his press briefing that he felt the European fiscal crisis was being managed successfully. In addition, Chairman Bernanke said that he does not expect the completion of Operation Twist in June to materially impact financial markets. Taken together, the FOMC's economic projections and the Chairman's comments suggest that the Federal Reserve is likely to be on hold for the foreseeable future. The FOMC made marginally hawkish tweaks to their Fed funds forecasts today. The average year-end 2014 FF rate rose 20bps to 1.32% (median +25bps to 1.00%). So on average the committee has now effectively built in one more hike before the end of 2014. But a Fed funds rateof 1.30% (or 1.00% for arguments sake) seems hard to reconcile with a comment Chairman Bernanke made in the press conference, which suggested "exceptionally low" equates to the current environment, i.e. 0-25bps. This again highlights the fact that while all members have a forecast, the core (Bernanke, Yellen, Dudley) carry much more weight when it comes to actual policy action. Bernanke clearly left the door open to further accommodation and our read on the press conference, after the Chairman explicitly stated he's expecting job growth of 150-200k, is that hiring will be a critical element to this assessment, a scenario that is certainly plausible. Barclays: The Fed's forecast changes also suggested it views further easing as less likely. The real GDP growth forecast for 2012 was raised, as were the overall and core inflation projections. The unemployment rate forecast was lowered throughout the forecast period. In response, several participants changed views on when the first fed funds rate hike was likely to occur. The two participants who previously forecast the first rate hike in 2016 brought that forward (presumably to 2015), and two others likely shifted it to 2014 from 2015. The median fed funds projection for the end of 2014 increased to 1.0% from 0.75%. FOMC participants who see the Fed tightening sooner presumably see less need for easing now. Chairman Bernanke explained the revised projections at the press conference, but was careful not to take further easing off the table if conditions warrant. We do not find this surprising, as there is little chance that the Fed would completely rule out further easing in the current situation. However, Chairman Bernanke also gave no signal that further easing should be expected. One notable comment was his view that only 100k jobs per month are now needed to keep the unemployment rate stable, significantly less than used to be the case. This is quite close to our own estimate (75-100k per month), driven by our view that retirements among the baby boomers are the largest factor pushing the labor force participation rate down. To the extent this represents a change in the Fed's view, it helps to explain why it is now looking for a faster drop in the unemployment rate. This entry was posted by Cardiff Garcia on Wednesday, April 25th, 2012 at 23:54 and is filed under Capital markets.