What Will The Fed Do Next?

This evening  the market will have some respite from the Greek (will they/won’t they/can they) default issues, and instead focus on the other great debt elephant in the room, namely the US with the Fed fund rate, FOMC statement with the last of these three releases being the most eagerly awaited for clues as to what the FED will do next.   Whilst the consensus of opinion is that rates will be held steady Ben Bernanke is also likely confirm the winding down of QEase2.  However, at the press conference (only the second ever held by a sitting Fed chairman) the market will be want to know when QEase3 is likely to start.  Of course, it won’t be called QEase 3 but will probably be some kind of reinvestment in maturing debt.  At the same time I believe Bernanke will also be exhorting US politicians to reach a consensus  on the US debt ceiling which needs to be agreed by the 2nd August.   Perhaps at the back of his mind will be the time in 1979 when  investors in T bills maturing on 26 April of that year were told that the US Treasury could not make its payments on maturing securities to individual investors.  The treasury was also late in redeeming T bills which became due on 3 May and 10th May 1979.  At the time the treasury blamed this delay on problems with its word processing technology, the high volume of retail and small investors and the failure of Congress to act in a timely manner on the debt ceiling legislation.  Whilst this episode could be classified as a mere “technical glitch”, it was nevertheless a “default” and with the US already on notice about its rating and market nerves stretched to breaking point, any hint of even a late payment would really herald the start of financial armageddon.

Running order for today’s FOMC meeting