The End of QE is Nigh

The day has finally come. After supporting the economy with its regimented buying of billions of dollars worth of treasuries and mortgage-backed securities month after month the end of QE is finally upon us.

Tomorrow, Oct. 29th, with its policy statement at 2PM ET, the FOMC is widely expected to announce that QE is finished. As high as $85 billion per month, strategic tapering of about $10 billion per month has dwindled the program down to just $15 billion in October.

Beyond the end of the asset purchase program, market watchers will look for changes in language such as the "considerable time" the Fed communicates regarding its target range for the federal funds rate.

Another key, according to strategists at Nomura, is the degree to which the FOMC statement acknowledges new risks to the outlook. The firm notes:

The key question for next week is the degree to which the FOMC statement acknowledges new risks to the outlook. First, financial conditions have tightened somewhat, and, if this persists, could be a modest drag on the outlook. Although, lower interest rates will tend to offset, to some degree, the negative impact of lower equity prices and higher credit spreads on aggregate demand.

Second, lower energy prices and the recent appreciation of the dollar, will have a notable impact on the near-term trends in inflation. Finally, the recent volatility in financial markets should make the FOMC more cautious as its approaches interest rate adjustment.

Some delay in lift-off seems likely given the lower trajectory for inflation and recent market volatility. How the FOMC characterizes the risks to the outlook will be an indication of how its expectations for the path of interest rate adjustment have changed."

Nomura expects the following at tomorrow's FOMC meeting:

• First, as noted above, we expect the FOMC to end its current asset purchase program at the meeting next week
• Second, we expect the FOMC to continue its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction
• Third, we do not expect the FOMC to make material changes to its policy guidance on interest rates at this meeting.
• Fourth, we suspect that there will be few changes to the discussion of trends in aggregate demand. As noted above, the economic data have largely continued to follow recent trends.
• Fifth, it is unlikely that the FOMC‟s statement will acknowledge potential risk to the outlook from developments abroad, but it is certainly possible.
• Lastly, the most substantive changes may occur in the comments on inflation. The recent declines in oil prices, if they persist, are likely to pull down inflation substantially over coming quarters. For example, we expect headline CPI inflation, on a y-o-y basis, to fall to 1.1% in Q2:2015. In this context, we expect the FOMC to note that declines in oil prices are likely to depress inflation for some time

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