Weekly Market Recap

Analyzing the FOMC Statement

Q: “Every so often, we hear the Fed is coming out with a rate announcement (policy statement). It seems to be a big deal beforehand. What are you looking for when those days arise”?

A: I think this is a great question, and the short answer is, “it depends”. Mainly, it depends on the timing and what is going on in the market environment.  In 2004-05, we were focusing on would the Fed increase rates to control inflation, and to balance the value of the dollar.  In 2008-09, we were focusing on would the Fed reduce rates to support the markets through the financial crisis that was developing (and that is still ongoing).  This week, it was “what’s old is new again” – although we know it is still a ways off, we are looking for signs of when the Fed will begin to increase rates from the near-zero benchmark where we currently sit to, once again control inflation and support the dollar.

Again, we know the tightening process is a ways off, but here are some of the signs we were honing in on this week:

·         The Fed Purchase Program: We received the confirmation we expected; that the Feds/Treasury trillion dollar MBS/Treasury purchase program, slated to end in June, will in fact cease as expected. No downside here; the only surprise would have been a hint of an extension.

·         Inflation: The Feds has concerns about longer run inflation expectations rising in the face of surging commodity prices.  Based on that, at some point, it will signal a hawkish turn for monetary policy and increase the odds that the Fed will boost interest rates (perhaps earlier than is now expected).

·         The Dollar: A question about the dollar gives Chairman Bernanke an opportunity to hit back at critics who argue current Fed policy has debased the dollar and driven money overseas in search of higher yielding instruments.  Tuesday's “strong-dollar” utterance by Treasury Secretary Timothy Geithner has given the Fed chairman some cover.

·         Jobs: The elephant in the room is the weak state of the job market.  Almost any credible forecast says it will take years for the unemployment rate to fall to acceptable levels.  Chairman Bernanke and his Fed peers have acknowledged this, and yet they are almost certain to have to tighten rate policy to stave off inflation, even if it doesn't help reduce joblessness.  It's the rock and hard place scenario.

Takeaways: Other than stating that the economy is recovering at a “moderate pace” and that the Fed purchase program was ending in June, no real surprises in the announcement. The board realizes that it will have to increase rates at some point to control inflation, but for now, anticipate the back and forth range trading we have witnessed in interest rates (particularly mortgage rates), to continue.

Still not sure if this is a great time to buy?  Ask me…I can help.