All Eyes on the Fed
At her news conference yesterday (9/17) following the two-day policy meeting of the Federal Open Market Committee, Fed Chairwoman Janet Yellen again suggested that the Fed does not plan on raising the target range for overnight interest rates for a "considerable time". This suggestion defied the expectations of many economists who thought this policy meeting was the proper forum to clarify or dial back such language in preparation for monetary policy tightening in 2015. As reported in the WSJ, "the new interest rate projections released by the Fed confirmed the widely held view that rate increases will not come until 2015. Fourteen of 17 officials expect to see rate hikes next year, while one said the Fed should start this year and two said it could wait until 2016. While the Fed's policy statement emphasized rates would stay low for now, its rate projections suggested some officials might have in mind a slightly more aggressive path of rate increases next year and in 2016 than previously thought. In June, the median estimate among officials for the Fed's target interest rate at the end of 2016 was 2.5%. The latest and most current estimate for the end of 2016 is now between 2.75% and 3%."
As expected, the unprecedented bond buying program known as quantitative easing or QE is coming to its historic end. Left in the wake of this massive program will be the management and eventual reduction of a now bloated inventory of more than $4 trillion of treasury and mortgage bonds. This program, aimed at holding down long-term interest rates to stimulate borrowing, spending, investment and growth, will end in October with a final purchase of $15 billion in mortgage and US Treasury bonds. As also reported in the WSJ, "after it starts raising interest rates, the Fed will allow the holdings to gradually shrink by allowing securities it holds to mature without reinvesting the proceeds. Chairwoman Yellen suggested that the portfolio of bonds could remain large until the end of the decade."
Charting a course to interest rate normalization has been compounded by stubborn growth and slack in the labor market, the latter indicator which has not abated even as unemployment has declined quicker than expected in 2014. As of July, the unemployment rate had fallen to 6.1%. The majority of Fed policy makers project that unemployment will continue to fall to a range of 5.1% to 5.4% by the end of 2016. One possible factor in the Fed's action this week was that inflation remains low as shown in a report that consumer prices fell 0.2% in August from July bringing the 12 month reading down to 1.7%, below the Fed target of 2.0%.
There is a lot of good reading on the pros and cons of the Fed's action this week. One article we liked can be found at this link:
http://finance.yahoo.com/news/-fed--yellen-keep---considerable-time--mis...
