29/4 FOMC Monetary Policy Statement this evening

The market now awaits the FOMC monetary policy statement this evening. The last FOMC meeting shocked the market as the Fed declared that it would move aggressively with expansion of its non-traditional monetary policy measures and most importantly, laid out plans to purchase US treasuries outright. This time around, the Fed can hardly expect to surprise the market to the same degree unless Bernanke announces imminent cash drops by helicopter across the USA.

The baseline scenario is that the monetary policy statement expresses continuity of existing policies with possible fine-tuning announcements as well as the hope that Fed efforts are gaining traction. Still, there is some chance that the Fed is not satisfied with the degree to which credit is being extended to the economy by the banking system, and especially, the disappointment that longer rates have failed to move lower.

The 3.00% level on the 10-year notes is very critical and an obvious market focus at the moment. So there is a reasonable chance that the Bernanke announces a stronger intent to manipulate the long end of the curve with an enlarged treasury-buying spree.

At the short end of the curve, with the rate effectively at zero and the Fed already having stated that it is likely to remain at zero for some time, we should expect no new guidance on the trajectory of the Fed Funds rate. A recent study by the Fed showed that the ideal interest rate in the US would be -5% - thus indicating how much it would like to lower rates wherever they can be lowered.

Market reaction: if Fed goes nuclear on rate lowering attempts again while risk appetite remains elsewhere, this could see the weak USD move extending in the short term.(USD very much coupled to equity markets at the moment, for example)