Tags: Investors | Fed | Charts | Yellen | Low-Rate | Message

Investors Ignore Fed Charts, Focus on Yellen's Low-Rate Message

Wednesday, 18 June 2014 07:50 PM

Investors trying to divine the outlook for Federal Reserve interest-rate moves are ignoring the dots and focusing on Chair Janet Yellen’s words.

Fed officials Wednesday released forecasts, represented as dots on charts, showing that starting next year interest rates would rise from zero faster than previously expected. But equity markets rallied on Yellen’s pledge of monetary stimulus for as long as necessary to achieve the central bank’s goals.

Yellen brushed aside concerns about quickening inflation, diminishing labor-market slack and asset-price bubbles in her opening statement and press conference, emphasizing the committee’s commitment to low rates “for a considerable time.”

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

The rally in financial markets that followed pushed the Standard & Poor’s 500 stock index and MSCI All-Country World Index to all-time highs. The moves marked a turn away from the Fed’s published rate forecasts that became a focus of investor attention after officials abandoned guidance tied to inflation and unemployment in March.

“All the evidence is that this is the weakest economic recovery on record, so she is going to tilt the committee in the direction of providing as much aid as possible for as long as it takes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Yellen’s press conference followed a decision Wednesday to continue reducing the pace of bond purchases intended to keep long-term borrowing costs low. The Fed said it would cut purchases by another $10 billion, to $35 billion, keeping it on track to end the purchases late this year.

Slow Pace

Yellen repeated that the Fed is likely to “reduce the pace of asset purchases in further measured steps” and that it expects interest rates to stay low after the buying ends. She declined to offer a more specific timetable for the first interest-rate increase since 2006, saying there’s “no mechanical formula.”

The S&P 500 Index rose 0.8 percent, while the MSCI All- Country World Index advanced 0.6 percent. The Chicago Board Options Exchange Volatility Index, known as the VIX, lost 12 percent to 10.61, the lowest level since 2007. The measure of volatility has dropped 23 percent this year, and is near its record low reached in 1993.

Even investors in the bond market ignored the move up in the median estimate by officials for the federal funds rate at the end of 2015 and 2016. Officials predicted the rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later. In March, they saw 1 percent at the end of next year and 2.25 percent in 2016.

Yield Declines

The yield on the 10-year Treasury note dropped seven basis points, or 0.07 percentage point, to 2.58 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices.

The median rate is calculated from a series of anonymous dots, or pin-point forecasts, that accompany officials’ outlook for growth, unemployment and inflation.

As she has in the past, Yellen downplayed the significance of the interest-rate forecasts.

“Around each of those dots, I think every participant who’s filling out that questionnaire has a considerable band of uncertainty around their own individual forecast,” she said.

David Robin, managing director and interest-rate strategist at Newedge USA LLC, the derivatives and futures arm of Societe Generale, said “the dots don’t matter.”

“Her goal was to take advantage of the press conference and the statement and recapture the lower-rates-for-longer message,” Robin said. “She nailed it.”

Editor’s Note: New Warning - Stocks on Verge of Major Collaps

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Investors trying to divine the outlook for Federal Reserve interest-rate moves are ignoring the dots and focusing on Chair Janet Yellen's words.
Investors, Fed, Charts, Yellen, Low-Rate, Message
Wednesday, 18 June 2014 07:50 PM
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