FOMC minutes: The light at the end of the QE-tunnel?AdvantageVoice® Blog—
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
The minutes from the Federal Open Market Committee’s (FOMC) December meeting were released today. The markets reacted negatively, with Treasury yields increasing and the stock market giving back its earlier gains. It looks like the main reason for the reaction was that the minutes suggest the FOMC is losing faith in its asset purchase program. There was little indication that the Fed would continue purchasing assets—right now, Treasury securities and agency-backed mortgage backed securities—past the end of 2013.
The FOMC set quantitative thresholds for indicating when it expects to increase interest rates. The minutes went into detail about the difference between “thresholds” and “triggers.” Although the thresholds were set at a 6.5% unemployment rate and a forecasted inflation rate of 2.5%, the FOMC does not want investors or the public to think that if those thresholds are crossed the FOMC will automatically and mechanically increase its target for the federal funds rate.
I think it’s important to note that the composition of the FOMC will be changing for 2013. The lone dissenter to more asset purchases and to setting the quantitative thresholds will no longer be a voting member of the FOMC. It is quite likely that the FOMC will be more dovish in 2013 than it was in 2012. That could mean that asset purchases could slow to a trickle toward the end of the year, but the language in the FOMC statements will intimate that the target for the federal funds rate will stay at zero well after the asset purchases cease. For 2013, short-term rates will likely stay very low, but we could see longer-term rates migrate higher.
The views expressed are as of 1-3-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.