The Federal Reserve Has Few Surprises For Investors - January 29, 2014
The Federal Reserve's Federal Open Market Committee (FOMC) has concluded its latest meeting within the last hour and it ended this get together by voting to do what almost everyone watching this periodic drama had believed it would, namely to reduce its bond purchases by $10 billion a month.
Specifically, the FOMC will taper its very popular program by going from purchasing $75 billion in Treasuries and mortgage-backed securities each month to $65 billion. In mid-December, the bank had voted to reduce such buying from $85 billion monthly to $75 billion.
Moreover, the Fed also indicated that it expected to reduce future bond purchases in measured steps at upcoming meetings. Our sense is that the FOMC will wrap up this program later this year, unless the economy suddenly stumbles or there are new shocks around the globe. Apparently, the recent flare-up of economic and currency woes in the emerging markets did not qualify as such a shock. Note that this was the last Fed meeting at which Ben S. Bernanke will preside; he will be replaced as new Fed Chair by Janet Yellen on Saturday.
Behind this latest move was a sense that the FOMC believes growth in economic activity had picked up sufficiently in recent quarters for there to be less of a need for aggressive support. Within this aggregate business picture, labor market indicators were mixed, but showing improvement; household spending and business fixed investment were advancing somewhat more quickly than before; there was less of a restraint from fiscal policy, and long-term inflation expectations were remaining stable, although currently such pricing was below the 2% target that the Fed views as healthy.
Taking all of this into account, the Committee continues to believe that the economy is pressing forward at a satisfactory gait. As a result of this constructive outlook, the Fed believes that it was prudent to "make a further measured reduction in the pace of its asset purchases."
Such a modest tapering should keep some downward pressure on long-term interest rates--the main goal of this program--securely in place for the time being. Moreover, the Fed suggested that it will continue to buy such securities until the outlook for the labor market has brightened substantially. We take that to mean late in 2014--at the earliest.
All in all, this seems like a sensible approach. At some point, the training wheels will need to come off the economy to see whether or not it can go towards full employment on its own. We probably are not there yet, but we are getting closer, in our opinion. It should be noted that the vote to undertake this additional tapering was unanimous, with both Mr. Bernanke and Ms. Yellen among the voters.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.