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FOMC Reveals Few Surprises 

Kristina Hooper 



US Investment Strategist Kristina Hooper breaks down the June 18 FOMC announcement, including what it means for markets, monetary policy and investors.
What Happened
The FOMC soothed markets by reassuring that it would remain accommodative, maintaining its projection for the timing of the first interest-rate cut and sticking to its existing taper timeline. The Fed also pledged to communicate the mechanics of any dialing down of its accommodative policy stance, if and when it’s necessary.

Key Takeaways
The Fed’s full-year forecast was hurt by harsh winter weather. The Fed recognizes that the economy has rebounded in recent months, but lowered its GDP expectations for 2014 because of a terrible first quarter. The Fed now expects the economy to grow between 2.1% and 2.3% this year, versus the 2.8% to 3% growth it expected in March. However, that doesn’t mean the Fed expects slower growth in the next few quarters.
No imminent change to monetary policy. Despite recent signs of growth and inflation, the Fed is not in a rush to change its accommodative stance. Fed Chair Janet Yellen said given the uncertainty in the markets, there is no definitive way to determine a timeline for tightening after the unwinding of bond purchases is complete.

More importantly, the median forecast for the fed funds rate over the longer term is lower than it was in March—3.75% instead of 4%. Even after the US economy hits maximum employment and inflation eclipses the 2% target, the Fed may keep the target rate below what’s considered normal for a long time.
Taper timeline remains intact. The Fed opted to continue tapering its bond purchases by $10 billion at each FOMC meeting, split evenly between Treasuries and mortgage-backed securities. It’s now down to $35 billion in purchases for July.
Any dialing down of accommodative policy will be measured and thoughtful. When the Fed decides to tighten monetary policy, it will be slow and deliberate to avoid rocking markets. Further, Yellen explicitly said that the Fed will communicate exactly how the unwinding will work before the end of 2014, but the pace and timing is still unclear.

What It Means for Investors
The Fed’s announcement, while it contained no surprises, was important in underscoring its commitment to remaining highly accommodative. This was particularly significant given that recent rhetoric from Mark Carney that the Bank of England might be raising rates sooner than the market expected. Plus, we’re seeing signs that inflation has increased recently in the United States, with the Consumer Price Index rising 0.4% in May after a 0.3% increase in April.

We remain in an environment of financial repression, which has reshaped the investing landscape. Investors need to ensure that they’re not overexposed to asset classes that have been rendered less attractive from a risk/reward perspective, namely cash and core fixed income. At the same time, investors need adequate exposure to risk assets such as high-yield bonds, convertible bonds and stocks to meet their goals.

However, with the Fed continuing to taper and coming closer to dialing down accommodation, expect more volatility and buy risk assets on the dip.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

A Word About Risk: Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Derivative prices depend on the performance of an underlying asset; derivatives carry market, credit and liquidity risk. Convertible and fixed income securities, particularly high-yield or junk bonds, are subject to greater levels of credit and liquidity risk, may be speculative and may decline in value due to changes in interest rates or an issuer’s or counterparty’s deterioration or default. Derivative prices depend on the performance of an underlying asset; derivatives carry market, credit and liquidity risk. Investing in a small number of issuers may increase risk and volatility. Securities purchased in initial public offerings have no trading history, limited issuer information and increased volatility. Leverage can magnify losses during adverse market conditions. Investing in mortgage- and asset-backed securities involves interest rate, credit, valuation, extension and liquidity risks and the risk that payments on the underlying assets are delayed, prepaid, subordinated or defaulted on. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. The cost of investing in the Fund will generally be higher than the cost of investing in a fund that invests directly in individual stocks and bonds.

Gross domestic product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

The Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time.


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