Here's what you need to know ahead of the Federal Reserve's two-day meeting, which starts today.
What the Fed says post-meeting is important. Why? A big reason stocks have performed well the past four years is due in large part to the Fed's decision to slash short-term interest rates to roughly zero and buy mortgage-backed bonds and long-term government bonds.
The Fed's goal: drive down borrowing costs in an effort to stimulate the economy.
The problem is Bernanke muddled the message on May 22 when he said the Fed might start dialing back its market-friendly bond buying if the economy shows signs of sustainable life, perhaps at one of its next meetings. Three things to watch:
--Timeline. Investors want more clarity on the Fed's "timeline" and criteria for reducing its $85 billion in monthly purchases. If not this meeting, will they commence it at their July meeting? Or hold off to September, October or even December?
--Pace of tapering. How rapid will the drawdown be? Will the Fed start buying, say, just $65 billion in bonds a month and gradually wind the program down? Or will it happen fast?
--Impact on rates. Will the tapering of bond buys affect how long they keep short-term rates at zero?
For clues, hone in on what the Fed says about the outlook for economic growth, inflation and unemployment. A slow-growth, low-inflation environment with weak job growth will likely allow the Fed to continue its current policies.
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