GOLDMAN: Here's How The Fed Will Try To Calm The Markets This Week

REUTERS/Lucas Jackson

$('.icon-tooltip').tooltip();A short excerpt from a research note by Jan Hatzius and Sven Jari Stehn at Goldman Sachs: FOMC Preview: Calming the Market

The economic data have improved a bit since the last FOMC meeting ... But the improvement has been far from “substantial.” Growth remains in the sluggish 1-3% range ... and jobs gains remain moderate.

Inflation, meanwhile, has continued to fall further below the FOMC’s 2% PCE target. ...

Financial conditions have tightened since the last FOMC meeting, as bond yields have risen, mortgage and credit spreads have widened ... The tightening in financial conditions appears in large part driven by worries that Fed officials will soon tighten policy.

... While we do not expect the committee to deviate much from the existing message, we anticipate that Fed officials will, on the margin, try to calm markets at the June 18-19 FOMC meeting.

We therefore expect the FOMC statement to show only modest changes, mostly focused on acknowledging the lower inflation numbers. Moreover, the committee is likely to downgrade its 2013 growth and inflation numbers moderately. While Chairman Bernanke is likely to reiterate in the post-statement press conference that the QE tapering decision is data dependent, we expect him to dissuade markets from frontloading too much of the entire monetary tightening process—not just the end of QE but also the normalization of the funds rate—as soon as the committee takes the first step in that direction.

The FOMC meeting is on Tuesday and Wednesday, with the FOMC statement and projections scheduled for release at 2 PM ET on Wednesday. Fed Chairman Ben Bernanke will hold a press conference at 2:30 PM. I'll post a preview on Sunday, but I don't expect any changes to policy.

View the original article here