Market Commentary by Scott J. Brown, Ph.D., Chief Economist
The Federal Open Market Committee left short-term interest rates unchanged, did not alter its forward guidance on the overnight lending rate, and said it would maintain its asset purchase program at $85 billion per month. The policy statement was a near photocopy of the previous one.
The FOMC indicated that recent inflation readings have been low due partly to “transitory influences.” The downside risks to the outlook for growth and the labor market had “diminished” since the fall. The FOMC repeated that it could “increase or reduce” the pace of asset purchases depending on how the outlook for the labor market or inflation changes.Fed officials slightly raised their projections of GDP growth for 2014 and revised their expectations for unemployment slightly lower.
In his press briefing, Fed Chairman Bernanke said that if the economy evolves as anticipated (growth picks up, unemployment falls, and inflation gradual moves back to the 2% target), then the FOMC would likely step down the pace of asset purchases later this year, and if the economy continues to improve, the asset program would likely come to an end in mid-2014 (as the unemployment rate falls to 7.0%).
However, Bernanke stressed (in his opening statement and a number of times in the Q&A) that policy will remain data-dependent.
Bernanke did not signal any change in monetary policy. Rather, his point was to outline clearly how the evolution of the economic outlook will drive policy decisions. Tapering is not tightening and an increase in short-term interest rates is still a long way off.
Bernanke used the analogy that, in reducing the rate of asset purchases, the Fed would be slightly taking the foot off the gas pedal. It won’t be hitting the brakes anytime soon. Nevertheless, stocks fell sharply and bond yields surged. It’s not clear whether the markets simply misinterpreted the Fed Chairman’s statements or were badly mispriced to begin with.
Next week, there are a number of potentially market-moving data releases. It may take some time for the markets to properly digest what Bernanke said.
|Last||Last Week||YTD return %|
Consumer Money Rates
|Dollars per British Pound||1.548||1.571|
|Dollars per Euro||1.324||1.269|
|Japanese Yen per Dollar||97.910||79.510|
|Canadian Dollars per Dollar||1.036||1.019|
|Mexican Peso per Dollar||13.358||13.706|
|10-year municipal (TEY)||2.89||2.89|
Treasury Yield Curve – 06/21/2013
S&P Sector Performance (YTD) – 06/21/2013
|Durable Goods Orders (May)
Case-Shiller Home Price Index (April)
New Home Sales (May)
Consumer Confidence (June)
|Real GDP (1Q13, 3rd estimate)|
|Jobless Claims (week ending June 22nd)
Personal Income and Spending (May)
|Chicago Purchasing Managers Index (June)
Consumer Sentiment (June)
|Independence Day Holiday (markets closed)|
|Employment Report (June)|
|Real GDP (advance 2Q13 + comprehensive revisions)
FOMC Policy Decision (no press briefing)
US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the US government.
Commodities trading is generally considered speculative because of the significant potential for investment loss. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Specific sector investing can be subject to different and greater risks than more diversified investments.
Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business May 31st, 2013.