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What will the Fed do Next Week?

Neena Mishra


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 threshold 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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