Bracing for the FOMC: 3 Years of Zero Rates, QE3, and 2012 Election

The Federal Open Market Committee is set for Tuesday, December 13.  This meeting will mistakenly be deemed as less important than other meetings because the FOMC is being grossly overshadowed by the shenanigans of Europe and what their central bankers and politicians are doing to save the Euro and the zone’s economies.  With the election cycle starting next month, this could be the last meeting that the committee doesn’t feel the pressure and influence of politics.  Also, keep in mind that this meeting will effectively mark the third year anniversary of the zero-rate environment.

We are looking for more definitive longer-term goals as well as whether or not securities purchases may continue to evolve.  We will be paying close attention to the interest rate cycle comments for an “unusually extended period” that has so far been promised (a promise which can be broken of course) that rates will remain exceptionally low through at least mid-2013.

One thing that not many outlets are focusing on is that this is the last pre-election cycle FOMC meeting.  The first 2012 FOMC meeting is January 24 and 25 and by then there will have been the following election events: Iowa caucus (Jan. 3), New Hampshire primary (Jan. 10), and South Carolina primary (Jan. 21).  The FOMC is not supposed to be influenced by nor dependent upon politics.  Still, many believe that the political swings of the time can and do influence policy.  It is not by accident that the head of the FOMC testifies twice a year in front of Congress.

Any long-term communications changes are likely to be pushed out to the January 24 to 25, 2012 meeting.  Any new round of asset or securities purchases will be referred to as QE3 for 2012, and it seems that mortgage securities could be the large beneficiary.  You would think that the GSE status of Fannie Mae and Freddie Mac gives the taxpayers enough exposure to the world of mortgages, but these are not normal times.

Canaccord Genuity called it… “This is just a sideshow to what is going on in Europe.”

One take is out there signaling that the meeting may be more important than we believe.  Credit Suisse noted that the FOMC seems poised to revamp its communications strategy soon.  Credit Suisse also believes that there is a growing chance of QE3 coming down the pipe in 2012, likely before the so-called “Operation Twist” is set to end around June of 2012.

JON C. OGG