Bernanke to Walk a Fine Line on Inflation, Growth
Federal Reserve Chairman Ben Bernanke is unlikely to announce a major change in monetary policy at his second-ever news conference later Wednesday, but investors will hang on his every word for clues on whether the Fed will scale back its presence in financial markets, analysts said.
"I don't think there's going to be any surprise… I don't really see any major changes coming up right now, I think they're going to see how the data are evolving," former Fed Governor Randall Kroszner told CNBC.
The central bank will release quarterly economic forecasts and analysts expect them to be revised lower to reflect the recent weakness, but they said Bernanke will be quick to say he sees an acceleration in the recovery.
"I'm sure he'll predict one," John Wraith, fixed income strategist at Bank of America Merrill Lynch (BAML), told CNBC. "I'm sure he won't announce any reversal of the stimulus."
The Federal Open Market Committee is likely to take the formal decision to end the second round of quantitative easing – a program under which it pumps liquidity in markets by buying assets – at the end of June but to leave the reinvestment policy in place, according to analysts from Barclays Capital.
"This could be accomplished by changing the language in the statement from 'will purchase' to 'will complete' its purchases of $600 billion in Treasury securities and 'will maintain its existing policy of reinvesting principal payments from its securities holdings,'" they wrote in a market note.
Mark Olson, former Fed governor, said he would be surprised if the FOMC did not vote unanimously to stay the course and that he does not expect big changes in the Fed's statement.
"Those words are parsed so carefully that they're very careful about what they're going to say," Olson said. "It's all going to be about the words in the statement… they will do just about the opposite of being creative."
Some market observers said that weak jobs data could prompt the Fed to relax monetary conditions even further, but Kroszner said the central bank will need to see the employment report in July to decide whether the weakness was transitory or it indicated a downward trend.
"I think there's a belief there's an underlying strength in the economy," he said, pointing to the fact that "productivity numbers have been very good" and investment in equipment and software was "pretty good."
Yields on the 10-year US Treasury note stayed below 3 percent, in part pushed down by worries regarding the debt crisis in the euro zone, and some analysts have said this shows the Fed can brush aside fears of price rises because of its extra-loose monetary policy.
"The bond market is telling you there's no worry about inflation out there," Gary Baker, head of European equities strategy at BAML global research, told CNBC.
The Fed's statement is due at 12:30 pm New York time and Bernanke's news conference is expected to start at 2:15 pm.
"We expect the Fed to revise down its GDP projections for 2011 and likely raise the core inflation forecast, which should not come as a surprise," the analysts from Barclays Capital wrote.
"We will monitor the press conference to see if the committee's characterization of inflation risk has changed given the trend in core inflation," they added.
The consumer price index for all items excluding volatile food and energy increased 0.3 percent in May, its largest increase since July 2008, while overall inflation was 0.2 percent month-on-month.
The statement is likely to say that headline inflation was pushed higher by a rise in commodity prices but that these have fallen back somewhat and inflation expectations remain stable, Barclays Capital analysts wrote.
"Several FOMC members have made comments in support of a formal inflation target. We expect the committee to discuss this topic in depth during its June meeting and would not be surprised to hear the chairman characterize the committee's views on the adoption of an explicit inflation target," they added.