If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.
The Federal Reserve is currently buying up $45 billion of Treasury securities and $40 billion of agency mortgage-backed securities every month (injecting $85 billion of stimulus cash into the banking system) and keeping the federal funds rate near 0%. Here's what the FOMC discussed at their July 30-31 meeting via the Fed's minutes release on August 21:
In looking ahead, meeting participants commented on several considerations pertaining to the course of monetary policy. First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony. Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014. At that point, if the economy evolved along the lines anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward the Committee's 2 percent objective. While participants viewed the future path of purchases as contingent on economic and financial developments, one participant indicated discomfort with the contingent plan on the grounds that the references to specific dates could be misinterpreted by the public as suggesting that the purchase program would be wound down on a more-or-less preset schedule rather than in a manner dependent on the state of the economy. Generally, however, participants were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases. A few participants, while comfortable with the plan, stressed the need to avoid putting too much emphasis on the 7 percent value for the unemployment rate, which they saw only as illustrative of conditions that could obtain at the time when the asset purchases are completed.
So the threat of tapering is scaring the market a little bit, but let's not forget that the Fed will still be pumping billions of dollars into the financial system. PIMCO's Bill Gross recently tweeted: "Gross: Pogo said, We have met the enemy & he is us. I say, All asset mkts peaking; W/o central bank ck writing we only have ourselves 2sell2". Some people even think that the Fed will raise rates next year. Does anyone think short-term Treasury yields will go negative soon? Related post: "US Treasury Nominal Yields Could Go Negative In Massive Flight To Quality; Kyle Bass On JGBs, USTs And Gold". It also looks like higher mortgage rates are starting to affect home sales when looking at Friday's new home sales data. I put up a bunch of charts below to show you what's going on.
First, check out the chart of $TLT, the 20+ year Treasury bond ETF. TLT is still in a near-term downtrend, which is possibly being corrected at the moment, but it's still trading inside a long-term ascending channel. I wouldn't be surprised if TLT ended up testing its uptrend support level between 95-100. But, more importantly, I want to see if traders can break through that support level and put a serious dent in the secular bull market in bonds, or see if the move in rates actually catalyzes the next deflationary collapse (deleveraging cycle squared). See the correlations below.
Now check out TLT vs. SPY and their correlation. You can see that TLT's fall is starting to drag down SPY, the S&P 500 ETF. It's not really a surprise since all asset prices are tied to interest rates. But now asset prices are worse off because interest rates have been massively manipulated by the Fed's bond purchases since the crash of 2008. They are trying to boost asset prices/lower interest rates to boost economic growth and employment. (Related post: "Household Net Worth (Inflation Adjusted) Recovered 56% of Losses from the Housing Bust, Great Recession (Peak to Trough Ending Q4 2012").) But it could be that government spending (the deficit) is the only real thing propping up the economy, which is a topic for another post.
Another good correlation to look at is IEF vs. XHB, the 7-10 year Treasury bond ETF versus the S&P homebuilders index ETF. XHB peaked out right after IEF did.
Now let's take a look at mortgage rates versus the July new home sales data. "Sales of new homes plunged in July. The seasonally adjusted annual sales pace of 394,000 missed analysts' expectations of 487,000" (USA Today). The 30-year fixed rate mortgage average (orange) and the 5/1-year adjustable rate mortgage average (green) both spiked since the beginning of May. The blue line is new home sales.
|(Source: St. Louis Fed)|
|(Source: St. Louis Fed)|
Links on the taper:
Morgan Stanley's Reinhart Sees QE Taper in Septemberg (Bloomberg Radio)
Stanford’s Hall Says Fed QE Is Weak Tool With Main Rate at Zero (Bloomberg)
ECB Council Members Split in Jackson Hole Over Room for Rate Cut (Bloomberg)
Fed Officials Rebuff Coordination Calls as Stimulus Taper Looms (Bloomberg)
Lagarde Calls for More Global Coordination as QE Exits (Bloomberg)
Kuroda-Bean Say Policies Spur Growth as Fed Weighs Tapering (Bloomberg)
Lockhart, Williams, Bullard's Own Words on Policy (Bloomberg)
Fed’s Williams Says Taper Speculation Has Cut Bond Market Froth (Bloomberg)
Fed Should Be Deliberative on Tapering, Taylor Says (Bloomberg)
Blinder: Fed MBS Plan Gets More `Bang for the Buck' (Bloomberg)
Fed's Fisher: September Is Time to Start Taper (Bloomberg)
Dealers Saw Fed Bond Buying Cut to $70 Billion in September (Bloomberg)
NY Fed Primary Dealer Taper Forecast Going Out to 2014 (DailyFX's John Kicklighter)
Tapering Becomes Significant From Here: Harris of Lloyds (Bloomberg)
Bullard Says Fed Need Not Hurry to Taper QE With Inflation Low (Bloomberg)
Fed's Lockhart: 'comfortable' with cautious September taper (Reuters)
UBS's Harris Sees Fed `Consensus' Toward Tapering (Bloomberg)
Fed should focus on mortgage buys, sell Treasuries: study (Reuters)
Fed Burned Once Over Taper Now Twice Shy on QE3 (Bloomberg)
FOMC Minutes Show Broad Support for Tapering Timeline (Bloomberg)
Fed could begin reducing bond buys in September: Lockhart (Reuters)
Looming September Fed meeting continues to drive markets – UBS (FXStreet)
Fed Seen Tapering Quantitative Easing Next Month (Bloomberg)
Treasury yield targets:
U.S. 10-Year Yields to Rise Above 3%, BlackRock’s Rieder Says (Bloomberg)
Barclays: "We expect 10y yields to reach 3.75% by Q3 2014 (MarketWatch's Ben Eisen)
Barclays Ups 10-Yr Treasury Yield Forecast To 3.75% For Q3 2014 (Barron's)
Pimco’s Crescenzi: Bond Market Now Priced For ‘Significant’ Rate Hikes (Barron's)
Goldman's FOMC Post-Mortem: "Tapering Likely In September" (Zero Hedge)
Larry McDonald: It's time to buy bonds (CNBC)
New Fed chair:
Wall Street analysts say Larry Summers is scaring the bond market (Quartz)
Obama says he'll decide new Fed chair in fall (AP, USA Today)
Yellen, Fischer Among Participants at Jackson Hole This Year (Bloomberg)