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Market Outlook

Janet Yellen’s First Fed Meeting: Forward Guidance

By March 20, 2014No Comments

HIGHLIGHTS:

  • The Fed announced an additional $10 billion per month in tapering, split evenly between Treasuries and MBS.
  • The Fed dropped its reference to 6.5% as a threshold for when they would hike short-term interest rates and indicated that they would follow a “broad array” of indicators, including “financial developments”.
  • The majority of members of the FOMC still see the first rate hike in 2015, but the pace of rate hikes is projected to be slightly quicker than previously estimated, even though the economic projections were adjusted downward.
  • There was one dissenting vote by Kocherlakota who favored sticking with the unemployment and inflation guidelines.

This was the first meeting for Janet Yellen to preside as Chairwoman, but it is also one with some unfilled seats. While there is plenty of uncertainty with many of the voting members in 2014, we think that the overall composition of the FOMC is likely to be more hawkish this year. While we don’t expect a significant change to current policies in the near term, we think that the changes at the Fed could mean we’ll be hearing differing views in the year ahead.

The Fed’s slower pace of bond buying means that its influence on Treasury yields will continue to decline, while the pace of economic growth and inflation prospects are likely to play a larger role in setting policy. We don’t see the shift from the numerical threshold of 6.5% unemployment to more qualitative information is all that different from the Fed’s previous approach. It allows the Fed more flexibility on policy, but may make it more difficult for investors to assess the Fed’s next steps. Treasury bond yields initially moved higher in reaction to the Fed’s statement, perhaps because of the indication that interest rates might move up more quickly once rate hikes begin. However, in her press conference, Yellen explained that the Fed remains committed to reducing unemployment and keeping inflation in check. All in all, our view is that the Fed is still committed to a “measured” approach to changing policy.