More of the same…..

FOMC Tweaks Statement, Projections for Fed Funds Rate Little Changed

by Mark Evans, CFA

Bond yields rose on Wednesday. The ten-year rose 5bp while the five-year rose about 3bp. About half of the rise came after the FOMC announcement. Overall, the FOMC announcement met expectations by changing little. The economic assessment was tweaked to acknowledge the improving (albeit slowly) economic conditions and to note the fiscal drag. It deleted a reference to strains in global financial markets. The committee also added a consideration about the size, pace, and composition of asset purchases. While still saying that they will continue purchases until the “outlook for the labor market has improved substantially” they added a note saying that the FOMC will take account of “the extent of progress toward its [the Committee’s] economic objectives.” That statement is in addition to consideration of the “efficacy and costs” of the purchases. This slight adjustment implies that the decision on purchases may no longer hinge on complete satisfaction of “substantial improvement.” This change effectively tweaks the Statement to be slightly less dovish, although there is no reason to doubt that purchases will continue for the foreseeable future.

In the Summary of Economic Projections, the Members’ projections for the future target Fed Funds rate was largely unchanged. The average projection calls for the overnight target rate to be at 0.50% by the end of 2014, 1.30% at the end of 2015, and at 4.00% in the long term. Interestingly, nine of the nineteen FOMC Members expect the target rate to still be below 1.00% at the end of 2015, which is unchanged from last quarter’s economic projections.