GOLDEN VALLEY, Minn. - After riling the markets earlier this summer with talk about reducing asset purchases, stocks and bonds rose sharply after the Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more signs of lasting improvement in the economy. Dan Ament, Financial Advisor with Morgan Stanley visited KARE 11 Sunrise to discuss.
Fed Delays Taper: Fed The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying. , saying it needs to see more signs of lasting improvement in the economy. "The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. While "downside risks" to the outlook have diminished, "the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement." Economists expected the Fed to reduce its purchases by approximately $15 billion a month according to a CNBC poll.
The Fed balance sheet: The Fed has kept interest rates near zero since December 2008 and undertaken three rounds of bond buying that have swelled its balance sheet to a record of $3.66 trillion, compared to a level of $869 billion in August 2007. The Fed currently buys $40 billion a month in mortgage debt and $45 billion of Treasuries.
The Fed's focus on employment and inflation: The central bank today left unchanged its guidance that it will probably hold its target interest rate near zero "at least as long as" unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent. Most Fed policy makers expect the first increase in the nation's benchmark lending rate to occur in 2015, according to projections released today. The federal funds rate target will be 2 percent at the end of 2016, according to the median of estimates by five governors on the Fed's board and 12 reserve bank presidents. That rate compares with their median estimate of 4 percent for where the rate should be at a time of full employment and stable prices.
Housing market health is key factor: Purchases of new U.S. homes plunged 13.4 percent in July, the most in more than three years, raising concern higher mortgage rates will slow the real-estate rebound. Mortgage applications have fallen in 15 of the last 18 weeks, reaching the lowest level since October 2008 in the week ended Sept. 6, according to a Mortgage Bankers Association index. The average rate on a 30-year fixed-rate purchase loan was 4.57 percent in the week ended Sept. 12, close to a two-year high, according to McLean, Virginia-based Freddie Mac. "The Fed is in a tricky spot, and housing has got to be the driver of consumption in this country." said Rick Rieder, co-head for the Americas fixed income at BlackRock Inc. in New York, which has $3.86 trillion in assets. "The amount they're going to taper has to be reduced."
Chairman Bernanke's successor still unknown: Summers's withdrawal from consideration adds a potential complication. It threatens to weaken the Fed's policy message by leaving the succession unsettled just as the central bank considers scaling back record accommodation. The move leaves Janet Yellen-current vice chair and former White House economist in the Clinton administration-as the likely, but far from certain, nominee.