Brian Jacobsen

FOMC: More buying and numerical targets

AdvantageVoice® Blog—12-12-12
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

The Federal Open Market Committee (FOMC) made a radical change in policy that a lot of people have been waiting for. It seemed like more a matter of “when” than “whether” they would do this: It is now offering inflation and unemployment thresholds at which it will begin tightening policy. Additionally, but less significantly in my opinion, the Fed will convert its maturity extension program (called “Operation Twist”) into an outright purchase program of Treasury securities. Instead of selling short-term securities and buying long-term securities (to “twist” the yield curve), the Fed will purchase $45 billion per month in Treasury securities without offsetting selling.

The FOMC statement suggests that the intention of the Committee is to stop its purchase program and then raise rates, in that order, when it deems appropriate. There was a little word added to the statement that is incredibly powerful: “this.” The FOMC has regularly said that it would keep rates “exceptionally low.” That leaves a lot of room for maneuvering as even 2% on the federal funds rate would be exceptionally low. Now, the Fed is specifically saying that “this” low rate of 0 to ¼ percent will be maintained. That little change makes a huge difference in telegraphing what Fed policy will look like.

As I expected, the Fed removed the language about a particular date (mid-2015) as to when it thought rates would rise, making it more dependent on the economic data. As long as the unemployment rate stays above 6.5%, the Fed’s forecasted inflation rate is not more than 2.5%, and longer-term inflation expectations stay well anchored, the Fed said it will keep the federal funds rate between 0 and ¼ percent.

This FOMC statement gives a lot of transparency into the Fed’s intentions. It should also assuage fears of those who think the Fed will sacrifice controlling inflation in favor of driving down unemployment. The Fed’s expansionary policies will end someday, and it just outlined what conditions must prevail to make that happen.

The views expressed are as of 12-12-12 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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