With what is going on in the rest of the world, the market can be excused for not watching the Fed with bated breath. The Fed will be coming out with its post-meeting statement this afternoon and the market is expecting few surprises there.
The Fed will leave short-term interest rates unchanged and is not expected to make any changes to its ongoing $600 billion bond-purchase program (QE2). The Fed will complete this program in mid-June; I don’t expect them to cut it short, as some are suggesting. Also, there is no reason for the Fed to come out with another easing program given the improving momentum on the recovery front. This morning’s better-than-expected reading on the Empire State Manufacturing survey is evidence of this continuing strength.
In its statement this afternoon, the Fed will most likely take note of the positive momentum in the labor market and ignore what some are referring to as early signs of inflation. There is just way too much slack in the system for inflation to be a concern at present.
But the Fed statement this afternoon will most likely be a sideshow for the market. It will remain focused on developments in Japan, particularly the nuclear reactors. With a complete meltdown of these reactors a real possibility, the market’s focus and attention makes complete sense.
Post-resolution of this issue, however, I expect the market to move on to other matters, with the Middle East and oil taking center stage all over again. But as important as all of these international events are, the ultimate driver of the stock market remains the outlook for the U.S. economy. And the momentum on that front remains positive; this morning’s Empire State survey confirms it again.