Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Before we get to Fed talk in the early action we've obviously seen the S&P 500 break through 1370 (with vigor), and last week's lows of 1365s. The previous week's surge down to 1357 is the next key level. Now of course with sharp selloffs there can be large reflexive bounces along the way – we saw that last Tuesday when the market skyrocketed on the back of Apple, but all that led to was more choppy action the rest of the week and then today's smack to the face. So unless one's timetable is measured in hours it's a market complexion one does not want to be dealing with much.
Off to Fed speak… as long time readers know the Fed has its special little birdies in the media that it likes to speak to us through, and Jon Hilsenrath is among the most prominent. Not surprisingly Jon says the Fed will stay pat at this meeting – I believe the key one shall be mid June as Operation Twist finishes up, and they need a replacement program. Any good correction in the market will also help as the Fed now believes their transmission policy for Fed can largely come through the transitory "wealth effect" of the stock market – even if that benefit accrues to a relatively small portion of society. [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses] On that end, we're probably half way to the point Ben will feel he must step in to make sure the "free" market goes up. 
If the Fed expects economic growth to slow, inflation to fall, or unemployment to stall at high levels or rise, it will be inclined to do more to support growth with new programs to reduce interest rates. If it sees the opposite, the conversation turns toward reining in credit. The changing forecast will be one of the most important topics of discussion at the central bank's policy meeting Tuesday and Wednesday, when officials will update their quarterly economic projections.
It's possible to handicap the Fed's changing forecast in part because officials are becoming open about it. And the outlook doesn't look like it's shifting in a way that would support new initiatives to boost economic growth. The new forecasts could project a little more inflation in 2012 than the Fed forecast in January, thanks in part to a recent rise in gasoline prices. It could also project a little less unemployment for 2012, thanks to recent declines in the jobless rate.
But with many officials still doubtful about the durability of the recovery and expecting inflation to recede, the broader view at the Fed seems likely to favor sticking to their plan to keep rates low until late 2014.
Taken altogether, the economy doesn't seem to be breaking in a way right now that would cause the Fed to shift the stance it laid out in January. Investors expecting a signal of an early rise in rates are likely to be disappointed. And those expecting a new bond buying program are likely to be disappointed too. The Fed is on hold until its forecast shifts more clearly.
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