The Fed has spoken......What did we learn?
In a statement released after the conclusion of the June 17-18 FOMC meeting we learned (or had confirmed for us) the following:
- The US economy has rebounded from a poor 1st quarter which saw a 1.0% contraction in GDP.
- Tapering continues. For the fifth consecutive meeting, the FOMC reduced monthly bond purchases by $10 billion. Monthly purchases are now set at $35 billion with a target end date in 2014. As reported in a 6/19/2014 WSJ article, "Investors view the Fed's decision to continue cutting back monthly bond purchases as affirmation of their confidence in the economy and its ability to withstand potential headwinds such as instability in Iraq and a slowdown in China." We agree.
- Inflation is running at or below the FOMC targeted rate of 2.0%.
- After a difficult winter, residential construction appears to be stabilizing.
- Manufacturing grew in May at the fastest pace this year.
- With four consecutive months of job growth above 200,000, officials expect the unemployment rate to fall to 6.0% in 2014. Expectations are for further reductions to about 5.5% in 2015 and 5.0% in 2016.
- Low market volatility, as measured by the VIX, is a concern shared by some committee members.
- Probably most important to the markets rise yesterday (6/18) was the commitment to keep short term interest rates low for an extended period of time. With this commitment came upward revised projections to the benchmark Fed funds target rates for 2015 (from 1.125% to 1.2%) and 2016 (from 2.4% to 2.5%). Looking out further into the future, the long run rate could settle around 3.75%, lower than earlier forecasts of 4.0%.
