As the financial markets begin to wind down for their summer lull, activity surrounding the Federal Reserve is hotting up. Next week, the FOMC will decide whether to give a clear signal that it will begin to taper its asset purchases at its subsequent meeting in September. Furthermore, President Obama has said that the appointment of a new Chairman (yes, he said “Chairman”, though he might have meant “Chair”) will come in the autumn, and controversially dropped broad hints that Lawrence Summers is being seriously considered for the job. Previously, it has been assumed that Janet Yellen was a shoo-in. Not any more.
What are the markets to make of this? Let us start with the easier one, which is the likely action of the FOMC on Wednesday. There is no compelling reason for a major change of language in this week’s statement. The economy has slowed in the second quarter, with many economists now predicting growth in real GDP of only around 0.5 per cent, but there have been signs of firmer activity in July, and the employment numbers due on Friday are expected to be firm. Read more