Fed Reserve meeting to deliver outlook for US economy, plans for bond purchases

TORONTO – Investors will be closely watching comments this week on the U.S. economy as a Federal Reserve committee provides its forecast and Fed chairman Ben Bernanke answers questions about the outlook.

The Federal Open Market Committee will begin the two-day meeting on Tuesday, and is widely expected to affirm its plans to continue its US$85 billion monthly bond purchases, though comments could provide more certainty on how much longer the program will last.

Some policy-makers at the U.S. central bank have been concerned that the purchases could eventually unsettle financial markets or cause the Fed to take losses. The purchases, commonly known as quantitative easing, are designed to boost the U.S. economy by increasing liquidity in financial markets.

But the language of the Fed comments will, as always, be put under the microscope.

“The Fed has indicated they will keep the quantitative easing tap open so long as the labour market does not show ‘substantial’ improvement. So the billion dollar question here is what does ‘substantial’ mean?” asked Peter Buchanan, senior economist with CIBC World Markets.

“They may not address that in the statement but you can be sure some people will try to get Bernanke to flesh this out.”

Buchanan said the Fed’s statement of economic projections will also be closely watched as the comments may offer insight into what members think about economic growth and the outlook for interest rates.

Meanwhile, the U.S. stock markets have been on a bullish run over the past week and a half, only pausing on Friday. The Dow logged 10 sessions of advances, its longest winning streak in more than 16 years, while the S&P pushed just a couple points away from its record-high close in 2007. On Friday, the U.S. markets took a breather and fell slightly.

“We reached a point where a lot of markets were really overextended and now they’re starting to either consolidate or correct back the other way,” said Colin Cieszynski, market analyst at CMC Markets Canada.

But the energetic climb may continue, and would extend what has already been a rally that has lasted 2 1/2 months.

Toronto’s S&P/TSX composite index hasn’t fared nearly as well this year, climbing about three per cent, compared to a solid 10 per cent gain on the Dow.

“Canada is beginning to look like the land the bull forgot,” wrote Bank of Montreal chief economist Doug Porter in a note.

“The underperformance of the TSX began in earnest two years ago, and sadly appears to be deepening. While the index has managed to claw out a modest gain so far this year, it remains close to the very back of the pack among the major (stock exchanges).”

Much of the TSX weakness has been tied to the underperformance of the resource sector, including gold stocks, but the downwards trend has been extending to the power of the Canadian dollar, which has fallen below parity early last month.

On Thursday, the Harper government will deliver the federal budget, which is expected to stay the course of fiscal restraint, without any major surprises.

Also on the calendar is the latest report on Canadian manufacturing activity out on Tuesday. Retail sales on Thursday are expected to show a more optimistic start to the year as January results projected to come in better than a year earlier.

In the U.S., February housing starts are due on Tuesday, with consensus expectations showing a 2.8 per cent rebound, according to BMO. Existing home sales are due on Thursday.