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Fed votes to continue taper, lowers growth expectations

Drops forward guidance, adopts hazier qualitative guidance

tighten money
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In a near unanimous vote, the Federal Open Market Committee of the central bank elected to continue the taper program of quantitative easing started at the end of 2013 under the former Fed Chair.

The FOMC voted 8-1 to cut its bond-buying program to $55 billion a month from the previous level of $65 billion. This is the third vote to approve and continue tapering, and the first under new Federal Reserve Chair Janet Yellen. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota was the lone dissenter.

“The FOMC currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” Yellen said.

She continued, explaining the decision to continue the taper.

“The FOMC currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the committee decided to make a further measured reduction in the pace of its asset purchases,” she said.

Beginning in April, the committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month.

(Download or view the formal announcement here.)

Troubling to those who want more concrete forward guidance on interest rates and QE tied to objective metrics, the Fed also formally changed its standard from the established 6.5% unemployment rate to a hazier “qualitative guidance” determined by a broad range of readings, leaving the Fed freer to act more subjectively. 

Questioned about the change in forward guidance, Yellen said, "The reason the committee revised forward guidance is not because we thought  it has not been effective. It's very useful...in helping markets understand our expectations in shaping their own. But as the unemployment rate gets closer to 6.5% and to breaching that threshold – markets want to know and the public wants to understand how we will decide what to do. The purpose is to provide more information than we have in the past. As unemployment rate declines below 6.5% we will decide how long to hold" interest rates at close to 0%.

She also reaffirmed that the FOMC is committed to a "2% inflation objective."

The markets immediately responded to the 2 p.m. ET announcement with a massive drop in all the major indices. Treasurys and yield dropped as well.

Stocks and investors clung to Yellen saying there could be a six-month gap before rate hikes after bond buying end, causing all major indices to plummet.  

"The committee endorsed the view that it anticipates it will be a considerable period after the asset purchase program ends before it will be appropriate to raise rates," Yellen said in the conference. 

The Fed has also downgraded its estimate of domestic economic growth in 2014 from 3.2% to no more than 3%.  They also expect the unemployment rate to hit between 6.1%-6.3% by the end of the year, beating the former estimate of 6.3-6.6%.

Yellen said much of the slowdown in the first quarter so far is due to weather, but they also acknowledged the fundamental weakness in the labor market, where downward pressure on the unemployment rate comes more from people leaving the workplace than from job creation.

“Between December and January there was data to be more optimistic of the economic outlook,” Yellen said. “We partly overdid the optimism in January.” 

“Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated,” she said.

The central bank also acknowledged that the housing recovery, such as it is, is tepid.

“Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing,” the Fed stated in a written release.

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