What will the Fed do Next Week? - Real Time Insight
December 04 2012 - 9:15AM
Zacks
While
most investors are currently fixated on the “fiscal-cliff” talks,
the market will also be impacted by the November jobs report due
Friday and then the outcome of the Federal Reserve’s FOMC meeting
next week.
Even though
jobs numbers are likely to be impacted by Super-storm Sandy; this
report will still be a factor in the outcome of FOMC's last meeting
of 2012.
Operation
Twist—which involves buying longer-term bonds and selling a like
amount of shorter-term treasuries—is expiring at the end of this
month.
Additionally,
Fed buys 40 billion of agency mortgage-backed securities each
month, under QE3. QE3 is an open-ended program, implying the Fed
will continue to buy bonds until they see a substantial improvement
in the job market.
In all, Fed
buys about $85 billion of long-term bonds each month under the two
programs.
Several FOMC
members have indicated that they support additional bond purchases.
Some of them have suggested adopting specific thresholds for
unemployment and inflation and continuing asset purchases until
those thresholds are hit.
On the other
hand, some members are not in favor of extending Twist or
thresholds.
What do you
think the Fed will decide in the next meeting?
1) Ramp up QE3 to buy $85 billion of mortgage
backed securities
2) Start outright purchase of long-term treasury
bonds to make up for the Twist shortfall
3) Start outright purchase but scale down the
amount as outright purchases are more “stimulative” than swapping
the shorter-term securitiies for longer-term securities
4) Do nothing now and act later in case the
economy actually goes over the cliff
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