Zacks_Analysts' Blog : The Fed in Focus - Analyst Blog

The positive stock market momentum of the last four days provides a favorable backdrop for Ben Bernanke's second news conference, which takes place this afternoon. The Greek vote and solid earnings report from FedEx (FDX) should help sustain the optimistic tone in the market. But the market's focus will be on the Fed.



In Greece, the reshuffled cabinet of Prime Minister George Papandreou was able to get a vote of confidence from parliament. This opens the way for the release of the next tranche of the original bailout funds approved last year. This gives the Greek government some breathing room, though they still have to enact and implement a host of tough and very unpopular austerity measures to win another round of bailout money.



No surprises are expected from the FOMC statement or the Fed chief's news conference. The FOMC is expected to keep the Fed Funds rate unchanged at the current near-zero level and reiterate to keep it there for an 'extended period.' The meaning of the 'extended' phrase in the FOMC statement has assumed new significance following the recent run of soft economic readings. 



The Fed chief will likely field questions on the QE2 program, which comes to an end later this month. On QE3, Bernanke will likely repeat his position from the last news conference when he downplayed the desirability of another round of easing given inflationary trade-offs. The Fed appears to strongly believe in the economy getting back on track in the second half of the year. A reiteration of that theme in the news conference will likely go down well in the market.



The eventual tightening of monetary policy, which has effectively been taken off the table by the ongoing economic weakness, will start not with the Fed Funds rate, but with the Fed's balance sheet. In the first phase, they will start reducing the size of the balance sheet by stopping the reinvestment of maturing bonds. That amounts to something like $25 billion a month. In the second phase, they will likely start selling bonds from their portfolio and may be simultaneously start raising the Fed Funds rate as well.



But all of that is way down the road. If the economy remains on its current weak trend line even in the second half of the year, then pressure will start building on the central bank for more monetary stimulus.



On the earnings front, FedEx came ahead of earnings and revenue expectations and provided a favorable outlook for the coming quarters. The improved outlook from FedEx is a key positive for the macro picture.  Adobe Systems (ADBE) reported better-than-expected quarterly results after the close on Tuesday, but provided a subdued outlook for the rest of the year. We also had better-than-expected numbers from Jabil Circuit (JBL) and La-Z-Boy (LZB) after the close on Tuesday.
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