The FOMC ends today and all eyes (literally) are on Ben Bernanke and what he will (or wont say). The conclusion of today’s FOMC meeting will potentially have significant financial market consequences. Following a close to- trend May employment report and decent retail sales results, the Fed’s assessment of economic conditions is likely to be little changed from that of the May 1 meeting statement, which in fact was little changed from the March FOMC meeting. Here is a summary of what some of the sell side analysts are saying (we just took two because they all basically say the same thing and no one can predict these things).

Ben Bernanke

Joseph LaVorgna Chief US Economist, Deutsche Bank, on Ben Bernanke and FOMC

Most importantly, market participants will focus on the Ben Bernanke’s postmeeting press conference. Recall that his recent JEC testimony reasserted his dovish stance toward the economy, as he emphasized ongoing labor market weakness. However, the markets reacted swiftly when in the Q&A he suggested the QE tapering process could commence sometime later this year—even going so far as to acknowledge this “could” happen before Labor Day. At the time, we believed Mr. Bernanke’s theoretical response was taken too literally by the markets, but the FOMC minutes from the May 1 meeting also took a surprisingly hawkish tone as a number of participants expressed willingness to taper QE as early as today’s meeting if the economic information showed evidence of sufficiently stronger and sustained growth. This discussion was significant, because it showed a willingness among a broad consensus of policymakers to consider a taper this year if their preconditions are met. Ben Bernanke will likely not yet show confidence that the time to taper is near, but we expect him to signal that an H2 taper remains plausible— depending on economic performance. To be sure, if GDP growth shifts toward 3-3.5% in H2 and payroll gains respond accordingly, policymakers will feel more comfortable easing-off the current pace of accommodation.

 BAML on Ben Bernanke and FOMC

The FOMC meeting will undoubtedly receive a substantial amount of market attention. In addition to the regular statement, FOMC members will update their economic and policy projections (all at 2 PM), and Chairman Ben Bernanke will give a post-FOMC press conference starting at 2:30 PM. On net, we expect the Fed to sound mildly dovish, which should arrest the recent rise in interest rates and give support to equities. However, there is a risk that some aspect of the FOMC’s communications will be seen as more hawkish by the markets, which could exacerbate the recent sell-off.

In light of recent soft data for both growth and inflation, we think it likely the FOMC will partially acknowledge this weakness in the statement and by members marking down their projections. In addition, we expect Chairman Ben Bernanke to sound relatively dovish in his press conference, noting the need for continued Fed policy support and the risks of prematurely ending accommodation. These outcomes should support stocks and ease the backup in rates.

Conversely, an if the Fed does not change its statement or forecast we believe the markets would see this as ratifying the current sell-off and thus hawkish, likely leading to a further rise in rates. So too would language discussing conditions for tapering to potentially begin over the next several meetings. Finally, while we expect Ben Bernanke’s comments to be dovish on net, any suggestion by Ben Bernanke that tapering could start soon would likely be seized upon by market participants and nullify any other dovish remarks.

Conclusion on FOMC and Ben Bernanke

What will really happen? Stay tuned for that news!

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