By Steven K. Beckner

It would also be surprising if the FOMC does not leave the door
open to expanding its securities holdings by echoing its March 13
statement that it is “prepared to adjust those holdings as appropriate
to promote a stronger economic recovery in a context of price
stability.”

The FOMC will presumably approve the continuation of Operation
Twist. It will also surely continue its policy of preventing the Fed
balance sheet from shrinking by reinvesting principal payments from Fed
holdings of agency debt and agency mortgage-backed securities in agency
mortgage-backed securities and of rolling over maturing Treasury
securities at auction.

But, looking ahead to June 30, some would contend that ending
Operation Twist and not putting in place some new program to keep
downward pressure on bond yields would amount to a de facto tightening.
So Bernanke is sure to be asked what measures the FOMC is prepared to
take at the expiration of Operation Twist.

The Fed’s remaining options are few and contingent upon the
changing economic and financial winds. The Fed has a limited amount of
remaining short-term securities that it could use to extend the balance
sheet-neutral Twist for awhile.

Or it could, if the jobs and inflation stars align, opt for an
outright QE3 — perhaps an incremental, conditional one — that would
further expand the balance sheet.

It has been suggested that the Fed might instead borrow money,
perhaps through reverse repurchase agreements, to finance long-term
securities purchases. But that so-called “sterilized quantitative
easing” option was greeted skeptically. It could backfire by pushing up
short-term rates, would pose communication problems and would complicate
the Fed’s eventual exit strategy.

Confirming what MNI had previously reported, Atlanta Fed President
Dennis Lockhart said last week that this idea “came from outside, not
inside” the Fed and has not been actively discussed by Fed policymakers.

In recent public comments, Bernanke has refrained from the kinds of
comments he made in his Jan. 25 press conference, when he repeatedly and
overtly talked about his willingness to launch a QE3 if the recovery
should falter.

At his next press conference, Bernanke seems likely to leave the
door to QE3 open a crack in more subtle ways.

It will be crucial to evaluate FOMC members’ revised economic and
rate forecasts as well, bearing in mind that the most important rate
forecasts are those of the actual voters.

In January, Fed governors and presidents revised down their
projections of economic growth and unemployment. Eleven of 17 projected
the earliest rate hikes coming in 2014 at the earliest — five in 2014,
four in 2015 and 2 in 2016. Only three saw the funds rate being raised
this year, and only two next year.

By the end of 2014, 11 policymakers expected the funds rate to be
1% or lower with six anticipating that the rate will remain near zero.

But when it came to FOMC voters, only one — Richmond Fed President
Jeffrey Lacker — voted against the “forward guidance” statement that
the funds rate is likely to stay near zero “at least through late 2014.”

As interesting as next week’s FOMC meeting will be, it seems likely
to yield any substantial changes in policy or even rhetoric. That will
only come later when there is greater clarity about just where the FOMC
stands on meeting its dual objectives.

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** MNI **

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