FOMC Preview - No Change in Policy Rate, Upgrade in Economic Outlook

The Fed is expected to leave the Fed funds rate unchanged at 0-0.25%. What the market interested in the most is whether the Fed will change the statement, '... economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period', that appeared in September. Concerning economic forecasts, the Fed should have upgraded its outlook on growth given strong economic data released since last meeting.

We anticipate policymakers to keep the above-mentioned statement with the phrase 'an extended period' retained. The Fed prefer to see the job market stabilize and recovery more sustainable before exiting from the current ultra-expansionary monetary policy.

Concerning asset purchases, the $300B Treasury purchase program was completed in the final week of October. In the September meeting, the Committee announced extension of the MBS and agency debt program through 1Q10. We believe not much new information will be given in November.

As mentioned in September's policy statement, '... economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased'. Now, strong GDP growth in 3Q09 should have 'confirmed' the recovery. The Board staff should have upgraded the central views on GDP growth while that for inflation probably remained low.

Market focus has turned to when the Fed will start hiking rate and the right timing should be until the labor market stabilizes and unemployment rate falls. In September, the Fed expressed worried that household spending remained constrained by 'ongoing job losses, sluggish income growth, lower housing wealth and tight credit'. We expect this concern will be reiterated in November's statement.