Liberty SBF Interest Rate Commentary: FOMC Meeting Outcomes, Inflation Expectations

October 31, 2013

FOMC Meeting

The Fed voted 9-1 to continue its $85 billion in monthly asset purchases, saying that there is still an elevated unemployment rate and that Washington’s economic policies continue to hold back growth. There was quite a bit of new language about asset purchases in the Fed statement, most of it useless in terms of timing the start and speed of tapering, except to reinforce the idea that tapering will be data dependent with comments such as “Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”
 
“Wait-and-see seems to be the prescription for the day,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “They’re on hold given that the data haven’t moved in their direction.”

Anderson predicts the Fed won’t make its first cut to bond buying until March.

Between now and year end, the most important factor in timing the taper is the Congressional Conference Committee on the budget. If committee members can reach an agreement with little or no fiscal restraint, the Fed will be able to taper. (Assuming the economy bounces back in the second half of the fourth quarter.) If the committee can’t reach a budget deal this year, tapering will be postponed until they do.
 
Inflation Expectations

The Fed repeated that inflation “has been running below the committee’s longer-run objective but longer term inflation expectations have remained stable.”

Fuel Charges Price gains have lagged below the committee’s 2 percent long-run target. The cost of living rose as projected in September as fuel charges climbed, capping the smallest year-to-year gain in five months. The consumer price index increased 0.2 percent after rising 0.1 percent the prior month, a Labor Department report showed. The Fed’s preferred gauge of inflation, the personal consumption expenditures index, rose 1.2 percent in August and hasn’t breached 2 percent since March 2012.
 
The Fed removed a sentence from its previous statement in September that had said tighter financial conditions could slow the improvement in the economy. Borrowing costs have declined in recent weeks. The yield on the 10-year Treasury (USGG10YR) note fell to 2.49 percent late yesterday from as high as 3.01 percent on Sept. 5. The average 30-year mortgage rate fell to 4.13 percent last week from as high as 4.58 percent in August. 

Click here for our CMBS Rate Sheet for the week of 10/31/13.