Last month Federal Reserve Chairman changed the September meeting to a two day affair. There was so much to do that it was going to take more than the requisite day to strategize and make the Federal Reserve Board announcement at 1:15 on the day of the meeting. Lately they have said that the economy faces headwinds and that inflation is not a concern. They have taken specific measures to stimulate the economy by lowering interest rates:
1) They bought $1.3 Trillion in Mortgage Backed Securities (QEI)
2) They bought billions is US Treasury Bonds ( QEII)
3) They announced at their last meeting that they would keep interest rates at these levels into 2013. They have never quantified the period of "accommodative policy."

Recently, Chairman Bernacke has give a couple of speeches that indicated that the FED has more ways to stimulate the economy if needed. This has calmed the stock market as sentiment grows that the FED is their friend.

The result of QEI was that mortgage interest rates hit all time lows and there was some extra disposable income in those houses that qualified to refinance. The result of QEII was inflation at the core of the consumer economy: food and energy. QEII also inflated the stock market by devaluing the dollar (creating the inflation). This was a highly controversial move by the FED that had Chairman Bernacke called out by the media, congress and Wall Street. It did work but all of this "pump priming" has yet to create any specific traction in the economy. What will they do next?

There is a lot of speculation that the FED's next move will be to sell shorter dated maturities and buy longer dated maturities: they will sell 2 and 3 year Treasury bonds they hold and buy 10 and 30 year bonds. This has been deemed "Twist" by the markets.
Stocks have rallied in hope that whatever the announcement is, it will be favorable to stocks, interest rates and the economy in general. The FED's job by definition is to control inflation and increase employment. Per the FED there is no concern about inflation and we all know that the employment picture is bleak.

What will they do? They will keep the announcement in line with the previous statement about rates at 0-.25% into mid 2013, announce that they will reshuffle their portfolio as anticipated (transparency has been important to the current board) but it will likely be less aggressive than people are looking for. Indicate that consumer confidence and consumer spending are weighing on the economy and clouding the employment picture. They will also provide another ray of hope by indicating that they still have other measures that can be taken, should they be needed (if growth moderates further) but they will not offer any clues or elaboration at this time.

The result: the markets will be soothed a little bit but stocks have been bought in anticipation of greater assistance from the FED so a sell off in the stock market is likely. Bonds should benefit because the goal of the FED is to lower rates and as the indicate that they will be buyers again this should stimulate demand.

Typically the day after a FED meeting in this environment is the best day to lock (see my post on "pigs and hogs"). Look for my follow up to the FED and weekly recap on Friday and my near term 2011 outlook on interest rates. Please go to my web site www.rglovermortgage for the lowest rates in Illinois.