Author: Erin

The FOMC policy statement and Ben Bernanke’s press conference this afternoon were designed to provide some comfort to rate markets. Simply said, so far all of it fell on deaf ears in the actual markets, especially the bond and mortgage markets. Bernanke in his press conference laid on in somewhat more detail what the Fed is presently thinking about the QEs, inflation and economic outlook. The Fed now believes that unemployment will continue to decline slowly and that the economic outlook is and has been improving. According to what he said, and in the context of the FOMC policy statement Bernanke did say based on present incoming information and what the Fed believes now, the end of QEs will likely be by Md-2014 at which point their easing’s would end completely; in the meantime the Fed will begin tapering soon as long as the economic assessments remain as the Fed sees it today. Of course he went on to couch the timeline, saying it is all data dependent. Throwing out a fig leaf, Bernanke added that if the forecasts turn out to be wrong in terms of employment and economic growth the Fed will be ready to increase QEs. The FOMC and Bernanke at his press conference confirmed that the FF rate will remain at 0.0% to 0.25% until unemployment rate falls to 6.5% or less; be reminded it is only a target and not cast in stone that when and if unemployment hits 6.5% the FF rate would automatically increase.

FOMC Excerpts:

“Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace.”

“Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated.”

“Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

“Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”

“The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.”

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

“The Committee is maintaining its existing policy of reinvesting principle payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

“The Committee will closely monitor incoming information on economic and financial developments in coming months.”

“The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”

“The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

“Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”

I hesitate to report this, but it is news; between the FOMC policy statement at 2:00 and Bernanke’s press conference at 2:30, CNBC had an interview with Bill Gross of PIMCO. Gross back in April was outspoken as we were that the end of the low bond rates had ended…and it has. Gross though told CNBC that PIMCO was presently a buyer of long dated treasuries and not a seller. When questioned he said the yields for his portfolios are beginning to look attractive. We recommend not tying your wagon to that view until the actual market suggests rates may rally a bit. Until the technical indicators reverse and as we have said for two months, the bond and mortgage markets are bearish. Consumers and loan originators that have resisted taking the increasing rates are feeling the pain at the moment. I still hold we will see some rebound from the climb, but until it occurs, and at what levels, the only way to look at the present market is that interest rates are showing no signs of any significant rebound.The 10 yr note will climb to 2.40% before it finds the next support—-that is only 5 bps way now.

Tomorrowweekly jobless claims at 8:30 are expected to have increased by 6K to 340K; At 10:00 May existing home sales are expected up 0.5% frm April. At 10:00 the June Philadelphia Fed index is expected at 1.0 frm -5.2 in May. Also at 10:00 May leading economic indicators are thought to be +0.2%.

S&P 500:                       1628.93 -22.88