First Fed Meeting of Janet Yellen Era

All eyes will be on the Federal Reserve this week, when the central bank concludes its first two-day policy meeting of the Janet Yellen era. Despite the recent turmoil in some emerging markets, the slowdown in Chinese activity, the events in Ukraine and weaker, weather-related US economic data, the Fed will likely announce another $10 billion dollar cut at this meeting, reducing monthly bond purchases to $55 billion dollars. The two looming risks are China and Ukraine, but neither situation is likely to deter the Fed from acting at the upcoming FOMC meeting. While China appears to be slowing, it is important to note the context: the much larger size of the Chinese economy today, versus double-digit growth in the past, means that 7 percent increases are potentially just as big as those in the 2000’s. Additionally, the Chinese government is actually engineering the slower rate, which means that if growth slows down too much, the government can easily push policy levers in the opposite direction.

With regard to Ukraine, if the situation results in a prolonged diplomatic stalemate, markets are likely to remain subdued. But if there were worsening violence or an escalation to a full-blown trade war, the impact would be more severe.

Regardless of events in China and Ukraine, there is some anticipation that the Fed will discuss the conditions under which it would finally raise interest rates, which have been at 0 – 0.25 percent since December of 2008 (pity the beleaguered savers!) The so-called “forward guidance” is meant to provide investors with a clear understanding of the Fed’s next steps, but one economist’s clarity is another’s murkiness.

The central bank is expected to abandon the quantitative approach that Ben Bernanke first mentioned in 2012. At the time, the then Fed Chief said that when the nation’s unemployment rate dropped below 6.5 percent, it would be a trigger for increasing short-term interest rates. But since that time, the unemployment rate has fallen faster than expected and has now come to be seen as a red herring for the recovery.

At the January FOMC meeting, officials said that they would not raise rates until the unemployment rate has fallen “well past” 6.5 percent, but there is a possibility that the Fed may adopt and communicate a qualitative approach, which would include a wider range of labor market indicators without any set numerical targets. The net effect for all of those savers: Be prepared for rock-bottom rates for at least another year.

This Fed meeting will also feature Federal Reserve projections about economic growth and unemployment, as well as Janet Yellen’s first press conference as head of the central bank.

MARKETS: Further evidence of a slowdown in China, combined with anxiety over Ukraine, pushed down stock indexes on the week.

• DJIA: 16,065, down 2.4% on week, down 3.1% YTD (biggest weekly loss since Jan. 24)
• S&P 500: 1841, down 2% on week, down 0.4% YTD
• NASDAQ: 4245, down 2.1% on week, up 1.6% YTD
• 10-Year Treasury yield: 2.65% (from 2.79% a week ago)
• April Crude Oil: $98.89, down 3.6% on week
• April Gold: 1379, up 3% on week (6th straight weekly rise)
• AAA Nat'l average price for gallon of regular Gas: $3.52 (from $3.70 a year ago)

THE WEEK AHEAD: Aside from the Fed, regional readings on manufacturing and a national report on industrial production are expected to show a modest increase in activity, after much of the severe weather has passed.

Mon 3/17:

8:30 Empire State Manufacturing

9:15 Industrial Production/Capacity Utilization

10:00 NAHB Home Builder Confidence

Tues 3/18:

FOMC begins 2-day policy meeting

8:30 CPI

8:30 Housing Starts

Weds 3/19:

2:00 FOMC announcement/economic projections

2:30 Janet Yellen Press Conference

Thurs 3/20:

8:30 Weekly Jobless Claims

8:30 Q4 GDP (final estimate)

10:00 Philadelphia Fed Survey

10:00 Existing Home Sales

10:00 Leading Indicators

Results of Fed stress tests released

Fri 3/21:

Quadruple witching (simultaneous expiration of stock, stock-index options, stock-index and single-stock futures, which can ramp up trading volume and volatility as investors and dealers scramble to open and close positions.)