FOMC Meeting Expectations
This Tuesday, June 18, the FOMC holds its fourth meeting for 2013. The two-day event concludes with the FOMC statement and new economic projection release on Wednesday, June 19. Additionally, Fed Chairman Ben Bernanke will hold a press conference after the statement release on Wednesday.
The next FOMC meeting will be held July 30 and July 31. The remaining 2013 meetings are September 17-18, October 29-30, and December 17-18.
As of Wednesday, June 12, the Federal Reserve has reported balance sheet holdings of $1.906 trillion worth of U.S. Treasury securities. That is a weekly increase of $12.259 billion from the previous week.
Maturity of those securities:
- $343 million: 91 days to one year
- $544.477 billion: one to five years
- $866.763 billion: five to ten years
- $494.490 billion: over ten years
The Federal Reserve now holds $1.165 trillion worth of 10-year or longer mortgage-backed securities. Since June 13, 2012, the Fed’s overall balance sheet has increased by $555 billion. On June 13, 2012, the 10-year U.S. Treasury yield (Figures 1.1 & 1.2) was 1.59%. Friday, one year later, the yield closed at 2.13%.
Since late May, the markets are challenged by the absence of a clear answer to three important questions:
- Is U.S. economic growth above or below trend?
- Should the FOMC taper or not?
- Does the environment suggest allocating toward cyclical assets or bond-like assets?
The investment community seems to be on hold. My expectation is for that dynamic to continue into the new calendar quarter. However, Wednesday’s FOMC meeting should provide a better outline as to the script for the Fed’s 2013 asset purchase program. At the very least, I expect the Chairman to use the press conference to reset expectations more toward the middle and away from the perceived hawkish view of late May.
Recent economic data, particularly manufacturing (Figure 1.3), seems to be feeling the temporary deflationary effects of the sequester. Expect the FOMC to acknowledge that by downgrading its inflation forecast. Current inflation (Figure 1.4) readings are back to the levels of late 2010 that motivated a second round of quantitative easing. Also at risk is the FOMC’s previous 2013 GDP forecast of 2.55%.
Investors are considering the beginning of the FOMC tapering its $85 billion per month asset purchase program. I would argue the rise in the 10-year Treasury yield to 2.25% is incorporating a $25 billion monthly reduction in the program. But I expect tapering is a late 2013 topic, at best. If a sharp positive snapback from the temporary effects of sequester is evident, then an argument for September or December tapering is warranted.
In terms of the actual fed funds rate, I expect the occurrence of a rate hike is early 2015 at best, long after Chairman Bernanke has left office.
Remember, the Chairman is an expert on the perils of deflation; this Wednesday he very well might remind the markets of just that.
Figure 1.1 10-Year U.S. Treasury, January 2012 to June 2013
Figure 1.2 10-Year U.S. Treasury, 2008 to 2013
Figure 1.3 U.S. ISM Manufacturing, June 2012 to June 2013
Figure 1.4 CPI, 2007 to 2013