After The Era of QE, the Fed Goes Neutral

Federal Reserve building, downtown Washington, DC, USA.

After nearly six years, the Federal Reserve officially ended the third round of quantitative easing started in September 2012 (the first was launched in 2008 and the second in 2010). The move was widely expected, but the tones used were slightly less dovish than estimated, which is why Treasury yields and dollar rose.

The market focused on the disappearance of an adjective from the statement released after the meeting yesterday. The under-utilization of labor resources is not “significant” but instead “is gradually diminishing.” It is a proof that the conditions in the labor market are improving beyond the mere level of unemployment, which still reflects the positive effects of monetary easing that dropped from 8% since QE3 was launched in September 2012 to current 5.9%. The adjective gave some economists a feel that the Fed is preparing to raise interest rates, still at historic lows since December of 2008 in the range of 0-0.25%. But such an event does not seem to be too close. The expectations are around the middle of 2015.

Another adjective that has in a sense reassured stockbrokers was “considerable”. For the US central bank is “appropriate” to hold rates at historically low levels for a “considerable” amount of time after the end of the plan by the end of the month of purchase of Treasury bonds and mortgage, “especially if the inflation projections continue to remain below the long-term target of 2%.” But some took as hawkish a specification that actually is a mantra within the Fed to tighten monetary policy depending on the situation. Basically, the text spread from the Central Institute explains that a rate increase may occur earlier or later than expected, depending on the progress towards the goals of full employment and price stability.

Some people focused on one sentence about inflation, “although in the short term it is probably destined to remain subdued due to lower energy prices and other factors, the Committee believes that the likelihood that inflation in the beginning of the year remains consistently below 2% is somehow diminished. In short, it is and turned around and the goal is to come back to the target set in the mandate of the Fed.

The general impression, however, is that the Fed now has put monetary policy in neutral mode. There is no selling or buy assets, nor cutting or raising rates. They are waiting and watching how the US economy will behave. For now, according to the press release, it does not seem concerned about any downward spirals from Europe or Asia.

“The Fed was consistent with what it’s saying for a long time,” said Jim Cahn, chief investment officer of Plymouth. The expert is optimistic about the stock market performance for the next 24 months: “I do not expect the Fed to pull the oars in a hurry. I do not see rates rise to record levels in the short term as well as I do not see a double-dip recession at least not without an unexpected shock.”

Jack McIntyre, manager at Brandywine Global, relates that the Fed is sending the signal to the stock markets that has given them quantitative easing for a long time and that if they want to be leaders of a rally, they must do so on a more normal basis of variables.”

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