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Danske Research is sounding a cautionary note on this week’s FOMC meeting.  Equity markets are largely expecting some reassurance of further Fed action.  It’s unlikely that the market would respond favorably to a statement that doesn’t imply further stimulative response:
“In the US the FOMC meeting is the main event next week. Recently, speculation of further easing has intensified. However, we believe that it is premature for the Fed to announce new easing measures at the upcoming meeting. That said, it is quite certain that the assessment of the economic situation will be downgraded following a range of disappointing economic data. Hence, the Fed will continue to communicate that yields will remain exceptionally low for an extended period. It will be interesting to see if Plosser votes against the extended period language again. If not, it will be a dovish sign.

Next week’s Fed meeting will be the main event for global bond markets. A more dovish Fed is likely to fundamentally support the current very low level of US 2-year bond yields, but will probably not be able to push them lower. Following the announcement there might even be a minor risk of disappointment given the recent talk about more QE, which we find premature. It will also be important to see if Hoenig dissents again. If not it would be a dovish sign.”

Source: Danske Bank

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