By Steven K. Beckner

(MNI) – The Federal Reserve’s first monetary policy meeting of the
year next week is unlikely to result in any shift of direction either
away from accommodation or toward greater credit easing.

Fed policymakers, for the most part, are quite comfortable with
their easy money stance and show no sign of wanting to move away from it
anytime soon.

That doesn’t mean the Federal Open Market Committee will be
unimportant, however.

In preparation for Fed Chairman Ben Bernanke’s semi-annual Monetary
Policy Report to Congress, the 12 Federal Reserve Bank presidents and
the members of the Fed Board of Governors will be compiling their
quarterly, three-year forecast of GDP growth, unemployment and
inflation. Policy going forward will depend, in good part, on how
economic reality corresponds with that outlook.

As pledged in its last two statements, the FOMC will also be
reviewing its large-scale asset purchase program, better known as
quantitative easing or “QE2.” But it seems unlikely that adjustments
will be made.

Chicago Federal Reserve Bank President Charles Evans, one of this
year’s voting members of the FOMC and a vocal supporter of the second
round of quantitative easing, told reporters changing QE2 would be “a
pretty high hurdle” on Jan. 7 at the annual American Economic
Association meeting in Denver.

Even less supportive Fed officials do not look for any change in
the size or pace of the plan to buy $600 billion in longer-term Treasury
securities by the end of the second quarter.

Dallas Fed President Richard Fisher, another FOMC voter who has
opposed QE2, told reporters last week that he expects, “barring any
significant changes in the data that the (QE> program announced in
November will be carried through.”

The New York Fed recently announced that it plans to purchase $80
billion in longer-term Treasuries through Feb. 9 — $5 billion more than
the average $75 billion the FOMC announced on Nov. 3. Total outright
securities purchases for the current period, including reinvested
proceeds of maturing mortgage-backed securities, are expected to be $112
billion — $2 billion above the previously announced average monthly
$110 billion. But the action is understood to be technical in nature and
has no policy significance.

The rise in mortgage rates makes a resumption of MBS purchases a
remote option and one that some officials said should not be ruled out,
but there is a strong disinclination by others to wade back into that
market. Proceeds of maturing MBS are being reinvested in long-term
Treasuries.

When the FOMC releases its policy statement after two days of
meetings next Wednesday afternoon, there could be some nuances in the
characterization of economic conditions. But it is unlikely to contain
any significant changes in the Fed’s basic policy stance, either
rate-wise or quantitatively.

The Committee will almost certainly announce that the Fed will stay
on course to buy $600 billion of longer-term Treasury securities by
mid-year. And it will surely reiterate that it “will regularly review
the pace of its securities purchases and the overall size of the
asset-purchase program in light of incoming information and will adjust
the program as needed to best foster maximum employment and price
stability.”

The FOMC will also very probably keep the federal funds rate target
between zero and 25 basis points, where it has been since December 2008,
and repeat its expectation that “low rates of resource utilization,
subdued inflation trends, and stable inflation expectations” will
“warrant exceptionally low levels for the federal funds rate for an
extended period.”

Although the “extended period” of near-zero rates troubles a few
officials, the majority sees it as necessary to keep inflation
expectations and in turn actual core inflation from declining further
below the Fed’s implicit target range of 1.6% to 2.0%. And QE2 is
viewed, in part, as a complementary communications tool to reinforce
that “extended period.”

That’s not all QE2 was expected to do. It was expected to keep
downward pressure on long-term interest rates and incentivize a shift
into riskier assets.

Although long-term rates have actually risen sharply since the
program was launched, Bernanke and others have vigorously defended the
program, citing various factors to explain the yield spike and
maintaining that real rates would have been even higher without QE2.
They have also pointed to the rise in stock prices.

So, while there is bound to be a debate about the efficacy of QE2,
the review of the program is unlikely to change mainstream thinking very
much.

With Kansas City Fed President Thomas Hoenig no longer voting, the
role of dissenter will fall to either Fisher or Philadelphia Fed
President Charles Plosser, both of whom have spoken out against the
second round of quantitative easing and questioned the indefinite
commitment to zero rates.

Fisher said last week he thinks monetary policy has “reached (its)
limit” in terms of what it can do to boost the economy and said he
“would be wary of further expanding our balance sheet.” Plosser warned
that the Fed’s “aggressive” monetary easing “may soon backfire” if the
Fed does not “begin to reverse” it. He said the Fed’s large-scale asset
purchase program “will need to be reconsidered” along with the overall
accommodative monetary policy stance if the recovery quickens or
“continues to gain traction.” He said “we may not be far” from needing
to halt QE.

Nevertheless, neither man should be considered an automatic
dissenting vote. If and when the FOMC decides to go beyond the $600
billion and expand the balance sheet even further, one or both might
well dissent unless economic and financial conditions had deteriorated
dramatically. But it remains to be seen whether they feel strongly
enough to dissent at this first FOMC meeting of the new year.

-more-

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