The Fed revises projections: Here’s what it means for your money (Part 1 of 2)
In their latest meeting, the Fed increased its projections for the federal funds rate in 2015 and 2016 while trimming their outlook for the long-term. While this was not a drastic policy change, there are still some implications for your portfolio. Matt Tucker explains.
Market Realist – The graph above shows the latest views from FOMC participants. The “dots” are estimates on the likely path and level of the Fed funds rate by FOMC members. While most members think rates should remain at their current level (0%–0.25%), most members think that by 2015, the target Fed rate will reach at least 1%.
Due to an improving economy following its previous meeting, the Fed said it will reduce its monthly mortgage and Treasury bond purchases (or quantitative easing) to $35 billion from its current $45 billion level, starting in July. This continues the Fed’s shift in monetary policy from “excessively easy” to “easy”, a process that has been underway since late 2013.
Fed Chairwoman Janet Yellen indicated that short term interest rates would likely remain at near-zero levels even after the central bank ends its asset buying program, citing slower economic growth potential in the near term. The Fed reduced its unemployment projection for the duration of this year, but anticipates faster economic growth in 2015 and 2016. According to the mean expectations of board participants the benchmark federal funds rate is now expected to hit 1.2% by the end of 2015 and 2.5% by the end of 2016. Longer term, the Fed reduced its terminal target fed funds rate interest rate projection from 4% to 3.75%.
Market Realist – The Fed funds target rate was lowered to its current level in late 2008 in response to the financial crisis. As the economy improves, the Fed will increase the rate. Going back to a pre-crisis level of 4% is possible in a timeframe as short as two to three years. Such an increase would have important implications in the yield and returns of bonds and equities.
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