Fed To Continue Bond Purchases, Updates Economic Outlook for 2014

The Federal Reserved (The Fed) release a statement this afternoon at the conclusion of their two day meeting and they will be holding their interest rate target at 0-.25%. More interesting was their discussion of the labor markets and whether or not they can begin to ‘taper’ their monthly purchases in the bond market. Investors are very concerned about the Fed pulling back on any of their current stimulus and the bond market has already begun to price in higher rates in anticipation.

In today’s release, the Fed indicated they will continue their bond purchasing program, in which they buy $85 BILLION in bonds each month. At his press conference, Chairman Ben Bernanke said that the Fed thought they may begin to reduce bond purchases by the end of this year. The Fed will not sell any of the securities they have been buying, but will only be slowing how many securities are added to the Fed’s balance sheet. Chairman Bernanke said that the Fed’s target of 6.5% unemployment was merely a threshold for changes in interest rates and not a trigger to automatically reduce economic stimulus. Interest rates were up mildly on the news of the Fed’s release.

Also of interest for investors are the Fed’s projections for the economy in the 2013 and 2014. They project the unemployment rate falling towards 7.2% in 2013, and 6.5% in 2014. This seems consistent with the amount of new jobs the US Economy is adding each month and further illustrates how long this recession recovery is taking. The Fed also commented on inflation, indicating they expect inflation to run less than their longer term target rate of 2%. The majority of the Board see interest rates staying at 0% into 2014, which also reiterates their previous statements that interest rates would remain low until the unemployment rate drops towards 6.5%.

Treasuries Chart, Jun 17, 2013

In other Fed news, in an interview with Charlie Rose this week, President Obama said “Bernanke had stayed longer than he wanted,” setting the stage for a new Fed Chairman when Bernanke’s term ends on January 31, 2014.