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Fed Watch: See you in September

As of 08-01-2013

In a statement that was a bit more “dovish” than the market had anticipated, the Federal Reserve on July 31 slightly downgraded their projections for growth at the conclusion of the two-day Federal Open Market Committee meeting.  The Fed downgraded their outlook from “modest” to “moderate” growth and pointed to higher mortgage rates and low inflation as factors they are watching closely.  The market also may have been mildly surprised that the Fed made no mention of lowering their unemployment target from 6.5% to 6.0%.

Beyond that, there was not much to see here.  The FOMC maintained their $85 billion of monthly purchases of Treasury and agency mortgage-backed securities (MBS), offering Fed watchers no sure signals on when the end to quantitative easing will begin. 

Earlier in the day, the government said the U.S. economy grew 1.7% in the second quarter, thanks to stable consumer spending and an increase in business investment.  The first-quarter growth rate was revised down to 1.1% from 1.8% as part of the government’s periodic overhaul of how it measures the size of the economy and how fast it’s expanding.  Those tepid growth figures are both well below the 2.3-2.6% rate forecast by the Fed in June.  The benchmark revision takes place about twice a decade, and on the positive side, it showed the economy grew faster in 2012 than previously estimated (2.8% vs. 2.2%).  Higher consumer spending and more farm production contributed to the improved performance.

Wednesday’s Fed announcement did nothing to disrupt 10-year Treasuries from hovering around 2.6%, a rate that supports our belief that the Fed will first outline their tapering plans with their September meeting.  We expect tapering to begin in December, with the Fed withdrawing their purchases of government and MBS securities at a rate of $15 billion per month and concluding in May or June.  In the meantime, the current environment will continue to support the equity markets and spread fixed-income securities.  And remember, there is a significant difference between “tapering” and “tightening,” and there could be considerable time between the two approaches.


 
 
 
 
 
 
 
 
 
 
 
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Federated Investment Management Company
Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.
The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest rates, and although the securities are generally supported by some form of government or private insurance, there is no assurance that private guarantors or insurers will meet their obligations.
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