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Brian Jacobsen

FOMC: The Fed’s got your back

AdvantageVoice® Blog—3-20-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

The Federal Open Market Committee (Fed) kept its policy rate target and asset purchase program unchanged in the March statement compared with the January statement. There was also the one lone dissenter, Esther George of the Kansas City Fed. 

The Fed said that, after a pause, the economic recovery is progressing at a moderate pace. This means it’s business as usual for the Fed: keep the federal funds rate target at zero, continue to purchase $40 billion per month in mortgage-backed securities, and maintain the purchase of $45 billion per month in Treasury securities.

Some of the changes in the policy statement were merely cosmetic, such as changing the sentence structure of some statements. However, one change was not cosmetic. The Fed struck a phrase that read, “Although strains in global financial markets have eased somewhat.” The Fed is keenly aware of the problems in Europe and the possible implications for the U.S. and global financial systems. Striking that phrase was a not-so-subtle way of saying, “The Fed’s got your back.”

Along with the policy statement, the Fed released its Summary of Economic Projections. I think investors will be looking at changes to these projections as leading indicators of when the Fed may change policy. Any slight shift in projections for the unemployment rate or inflation rate could trigger market moves. 

There were two notable changes in the projections:

  1. In the longer-term projections, inflation could be slightly higher than the Fed’s 2% target.
  2. There seems to be a growing consensus in the Fed about when the target rate should begin to rise. At the December meeting, two individuals thought the target rate should rise in 2013 and three thought it should rise in 2014. Apparently, one of the individuals who thought a higher rate would be appropriate in 2013 shifted instead to 2014. It’s a small change, but a change nonetheless, indicating that there will likely be little risk of premature policy tightening.

There were no indications that the Fed will begin slowing its asset purchase program or raise rates sooner than indicated by previous projections. There may be underlying fears of inflationary pressures building further out in time, but it seems as though fears of worsening financial stress will dwarf those concerns.

Despite the Fed’s stance, I think it’s important to remember that there are six threats to the near-term outlook keeping me somewhat defensive:

  1. The Cyprus situation is still not resolved. It’s a delicate situation that could deteriorate quickly if the public loses (more) faith in the eurozone institutions and governments.
  2. Italy still doesn’t have a government in place. The February 25 election resulted in a fragmented parliament, and the citizens may need to go back to the polls. The somewhat rebellious Five Star Movement could use the Cyprus situation as an example of why Italy would be better off ditching the euro.
  3. China may need to continue tightening monetary policy to tamp down inflation and defuse problems in its real estate sector. The banks in China are not in good health.
  4. Venezuela will need to elect a new president. The front-runner appears as if he will continue the populist policies of Hugo Chavez, which could continue to strain relationships between the U.S. and Venezuela. My fear is that other countries in South America will follow Venezuela’s lead, much like what Argentina and Bolivia have already done.
  5. Syria is still embroiled in a civil war. With the Iranian presidential election in June, it’s a giant unknown as to what might happen, considering Iran is an ally of the Assad regime in Syria.
  6. The U.S. federal government may have a temporary shutdown as it doesn’t look like a budget will be passed by the time Congress goes on spring break on March 23. There is a continuing resolution in place to fund government programs and agencies, but it expires on March 27. Congress may need to work through spring break to at least pass another continuing resolution until a budget can be agreed upon. There is the risk that a continuing resolution won’t be agreed on and the federal government therefore shuts down temporarily. Considering all the other troubles in the world, this is not my main concern, especially as it relates to the markets.

The views expressed are as of 3-20-13 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.

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