By Carla Mozee, MarketWatch
LOS ANGELES (MarketWatch) — The Federal Reserve will meet this week, and with the consensus that it will keep its ultra-loose monetary policy in place at least through year’s end, a hint that stimulus measures will be tapered sooner than later could trigger a downshift in U.S. stocks.
Week ahead: Fed, China
Next week's will bring the Fed's monetary policy meeting and Ben Bernanke's press conference. Plus, look for a report on whether China's economy has recovered. Polya Lesova reports. Photo: Getty Images.
Analysts say the central bank is wary of creating turmoil for markets, and expect the Fed to largely stick to its script this week, which would result in bond yields remaining in ranges and gold clinging to a recent downtrend.
“The Fed understands this is a touchy subject...and at some point, they have to put their foot off the gas. The key will be how they do it, how they signal it,” said Matthew Tuttle, chief investment officer at Tuttle Wealth Management LLC.
Talk that the Fed will possibly slow the pace of bond purchases has been steady since policy makers are set this week to debate the asset purchase program, and as investors have received a slate of improving economic data.
The rate-setting Federal Open Market Committee will gather for a two-day meeting that ends Wednesday. It is expected to keep interest rates near zero, where they’ve been since December 2008. It’s also expected to continue its quantitative easing program of buying $85 billion a month in Treasury and mortgage debt, “especially with sequester layoffs a reasonable consensus forecast,” analysts at Credit Suisse told clients late last week.
“The Fed told us they want asset values to go up, stock prices and housing prices to go up, and that’s one of the main goals of QE and that’s working,” said Scott Wren, senior equity strategist at Wells Fargo Advisors.
With the Fed having just announced in December the expansion of asset purchases by $45 billion a month, and as risks including high U.S. employment remain, it would be “perceived as an erratic move” by the Fed to signal it will back off its strategy, Wren said.
Minutes from the Fed’s January meeting showed many Fed officials are worried that the bond buying, along with the low interest rates, are setting the stage for higher inflation and overheating in some markets.
Wren expects Bernanke to continue to reassure investors that he backs asset purchases, and “that’s been a big part, I think, of this rally we’ve seen.”
This month benchmark equity indexes have shined. Last week, the Dow Jones Industrial Average /quotes/zigman/627449 DJIA -0.17% hit record highs and logged its fourth week of gain. The S&P 500 index /quotes/zigman/3870025 SPX -0.16% and the Nasdaq Composite Index /quotes/zigman/12633936 COMP -0.30% each notched their third week of advances.
Friday saw the first losing session for the Dow this month, and all three indexes closed slightly lower.
The Fed will release a statement on Wednesday at 2 p.m. Eastern time, and at 2:30 p.m. Eastern, Federal Reserve Chairman Ben Bernanke will hold a press conference.
If the Fed were to give any indication that it’s mulling changes in policy, “you’d get the pullback [in stocks] right away. The market would not respond favorably to that at all,” said Wren.
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