What Fed Statement Spooked Markets? – Real Time Insight

Expect some tapering in the fall, but the timing is TBD

   

We survived it!  

The FOMC minutes for July were released on Wednesday.  The sun stayed up and is still shining, at least out here in California.  I checked weather.com and it is still shining in Chicago too.  However, there looks to be a thunderstorm due for Chicago tomorrow.  

That leads me to my Real Time Insight for today.

What about the damage to markets?

The 10-year U.S.Treasury effective interest rate moved from 2.82% to 2.88%. 

That’s a fresh high.

My RTI question?

Which of the following statements did the MOST damage to the bond market?

(1) After initial turmoil in the wake of its June meeting, Fed officials thought generally that the market expectations had settled down by late July and were “aligned” with Fed views.

(2) Generally, participants were satisfied investors had come to understand the data-dependent nature of the Committee’s thinking about asset purchases.

(3) A few participants, while comfortable with the plan, stressed the need to avoid putting too much emphasis on the 7% value for the unemployment rate. They saw this only as illustrative of conditions that could obtain at the time when the asset purchases are completed.

(4) Almost all of the Federal Reserve officials at their July meeting backed Fed Chief Ben Bernanke’s stance that the Fed would slow down the pace of its $85 billion-per-month asset purchase plan later this year if economic conditions continue to develop broadly as expected.

(5) The central bankers did not signal as to whether such a taper would come in September, October or December, the three remaining meeting dates.  There were few signs that a majority was poised to pull the trigger at the September meeting. While a “few” argued that “it might soon be time to slow somewhat” the pace of asset purchases, another “few” counseled patience.

(6) Nonetheless, some participants felt that, as a result of recent financial market developments, overall financial market conditions had tightened significantly, importantly reflecting larger term premiums.  They expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.

(7) Several others, however, judged that the rise in rates was likely to exert relatively little restraint, or that the increase in equity prices and easing in bank lending standards would largely offset the effects of the rise in longer-term interest rates.

(8) Some participants also stated that financial developments during the inter-meeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels.

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