Today’s FOMC gathering is likely to yield little more than a bit of fine-tuning of its newly created communications policy and could also show a Fed that has turned a notch more optimistic on the prospects for the US economy. While no major announcement is expected at the 2:15 hour, we might be treated to some details on how the central bank plans to project short-term interest rates in 2012. The actual strategy for doing so could be presented in about six weeks after the Fed’s next meeting. However, the US central bank could have a big lump of coal on offer today for those who categorically assured the rest of us that QE3 was a “done deal” and that bond-buying sprees were going to be a part of 2012’s Fed agenda.
The reason the Fed might just turn into the Grinch who stole such bold predictions of never-ending easing is not hard to find; it is the overall tenor of recent US economic metrics. In fact, the string of statistics related to the general health of the American economy is starkly at odds with the majority of economists’ predictions. Such expectations have missed the actual mark by the most in nine months, according to the so-called Citigroup Economic Surprise Index. No need to rehash all of the improved readings here, but among the highlights of same would be the November unemployment level (lowest in two years) and the level of manufacturing activity (best in five months).
Actually, the US economy-according to the Wall Street Journal- is exhibiting the fastest rate of growth in this final quarter of 2011 since Q2 of last year. While Europe remains a worry item for the US, Q4 growth projections have been upwardly revised by firms such as Goldman Sachs, T. Rowe Price, and Nomura Global Economics. It is still entirely possible that the first quarter of the coming year will come in with growth metrics below those of the current quarter, but the way 2012 is shaping up has surprised more than one economist and has been one of the contributing factors to the dollar’s recent vigor (Europe largely being the other).
Such improvement in key US economic metrics has prompted some to suspect that the Fed may not only not pull a QE3 ‘rabbit’ out of Santa’s hat today, or in January, but that it will possibly shift its hitherto believed to be ‘carved in stone’ interest rate pledge before the middle of 2012. You can surely bet that the Fed’s distancing itself from the commitment to keep rates ultra-low through mid 2013 one year ahead of that time will have an effect on markets and investor psychology. You already know who and what has thrived in the three years during which the Fed has basically been at or near zero, interest rate-wise. The “zero interest rate party” crowd might have to rethink its propaganda literature and come up with new ways to frighten and/or embolden their readers.
Speaking of being emboldened, would-be President Newt Gingrich is certainly that, now that he is dominating the ever-shrinking field of GOP candidates for the job. Never mind that participating in Donald Trump’s ‘debate’ (aka a ratings ‘extravaganza’) or calling Palestinians an ‘invented’ people could still come back to haunt the man, there is one potential issue to consider –one that involves taxes and the US budget deficit. In a nutshell, the Gingrich tax plan could add 1.3 trillion dollars to the US’ budget gap by 2105 (so much for balancing the Gingrich administration’s books).
A study by the non-partisan Tax Policy Centre reveals that Mr. G’s plan to slash the top individual tax rate and eliminate cap gains and estate taxes could make the revenue side of the government’s budget fall some 35% (!) below the current year’s levels. The analysis prompted one senior official at the TPC to remark that the Gingrich plan ‘blows a huge hole in the deficit.’ Meanwhile, the Gingrich camp is counting on the plan creating economic growth and “dramatic” job creation.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America