At the conclusion of this past week’s Federal Open Market Committee Meeting (the branch of the Federal Reserve Board that determines the direction of monetary policy) Federal Reserve Chairman Ben Bernanke confirmed that the Fed may begin to taper off its $85 billion in monthly bond purchases. If the economy continues to improve and achieves the Fed’s objectives, the possible bond purchase scale-back may begin toward the end of this year and end in mid-2014.
This provisional timetable for easing off monthly bond purchases, known as QE3 (Quantitative Easing – third round) does not necessarily mean the Fed is in a rush to raise interest rates. Even after QE3 ends and the economic recovery strengthens, the Committee expects to maintain, for a considerable period of time, a monetary policy that encourages continued economic growth and an improved employment rate.
In particular, the Committee decided to maintain the historically low interest rate target range for the federal funds rate, as long as the unemployment rate remains above 6.5% and inflation remains under 2%.
In our view, investors should not have been terribly surprised by the Fed’s announcement that they may begin reducing their monthly bond purchases. However, given last week’s market decline, the mere thought of the QE3 punch bowl being taken away has apparently spooked some investors. We continue to see favorable conditions, and believe that any meaningful correction in the market is part of a healthy process.
*The information contained in this email was derived from sources believed to be reliable, but completeness and accuracy are not guaranteed. The opinions expressed constitute our judgment as of the date of this email, but are subject to change without notice. Past performance may not be indicative of future results. This information is not intended as an offer or solicitation for any financial instrument. The opinions expressed do not take into account individual client circumstances, objectives, or needs and are not intended to be investment recommendations or strategies.