F_O_M_C Context-What to expect

The market has priced in certain expectations from the F_O_M_C statement today, any significant deviation or any thing left out could cause the market to become very volatile in either direction.

The MEP (Maturities Extension Program) which is selling short dated debt and buying long dated debt or Treasuries, is expected to be changed in to outright buying of the long end or QE for Treasuries at the long end of the curve as they run out of short debt to sell and as I mentioned last night, international (Chinese/Japanese) buyers of our debt at auctions like yesterday are disappearing, that leaves the F_E_D to take up the slack.

In addition to the already announced $40bn a month in MBS purchases, the market expects about an additional $45bn a month of Treasury purchases and for this to continue through 2012 for $85 bn a month of expansion.

If anything is significantly different like they are willing to buy more in treasuries, the market hasn't priced that in and it would likely be bullish. If they come in at $25 bn as some in the F_E_D have suggested, the market likely would be disappointed. If the F_E_D doesn't announce some Treasury buying program today, the market would be very upset and likely crash, however I think this is pretty unlikely to happen.

The other issue is the F_E_D's yardstick for measuring monetary policy which includes employment and inflation, this is something the market is not too happy with as it is an unknown replacing a known (an actual date), so if it seems the F_E_D has made significant progress in defining this new formula, the market may not like that, if they haven't the market may like that more or if there's some compromise that includes dates rather than just economic data as it comes.

Just a few key things to listen for vs market consensus.