after the Fed meeting - a few caveats

Hi,

On Wednesday ended a two-day meeting of the FOMC, which as always ended with a conference of the Federal Reserve Chair. <full statement>

Compared with the last FOMC meeting, the message on the major issues has not changed.

Below the most important issues:
- FED reduces QE by $ 10 billion to $ 35 billion a month;
- Forecast of GDP, down sharply (by a weak first quarter) other years are not changed;
- Forecast the unemployment rate, below;
- Inflation forecast above, but only in the current year;

Table 1. Economic Projections of FED, June 2014

Dot chart - up,



chart 1. Target, federal funds rate at year-end; June 2014

 

The consensus at the end of 2015 shifted from 1 to 1-1.25%, this could mean up to 4 increases in interest in the next year; on the other hand, as to the long expectation rate decreased from 4 to 3.75%

chart 2. The appriopriate policy rate at year end 2016

The big picture: the median Fed Funds rate forecast for 2016 was raised from 2.25% to 2.5% which means that preliminary fears about a lowering of the terminal growth rate appear to be, for now at least, overblown.

During the asking questions, Janet Yellen was asked if there is something out of place with the S&P hitting all time highs at a time when even she (not to mention numerous other Fed presidents) discuss froth in the bond markets. Her answer: no. Specifically, based on some "model" the Fed watches to get a "feeling" for valuations, she concluded the equity valuations are not out of historical norms.

 

In other words, "no bubble here."

 

I am personally very surprised that the Fed chief speaks about the shares on the market are overvalued or maybe undervalued. In line with the majority of theses central bank should focus entirely different issues related to the economy and not to tell the public that in their opinion the shares are expensive or cheap.

On the main page of the central bank is clearly written what the Fed is and what should be its main responsibilities.

"The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

 

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services."

The question of whether the price of the shares on the U.S. market are too expensive or cheap is a relative term. It is no secret that the valuation of the company at a wide range of parameters, which depend on the experience of the analyst and his individual objectives.

 

Therefore, I believe that it is inappropriate provision of such opinion to the world by people who should be dealt with completely different issues. In my opinion this is pure speculation on the part of the head of the Fed, which in the long term may negative affect the U.S. economy.

Four increases in interest next year is a lot, but the market at the moment will not even care. Certainly become more important inflation figures-if inflation will rise and the labor market will remain strong perspective of rate increases next year finally begins to strengthen the dolar.

 

Yellen admittedly ignored the rise in inflation in May, but if inflation will increase the FED will have to respond. So far, investors have focused mainly on the labor market, because it seemed that U.S. inflation will remain below the target in the foreseeable future. U.S. CPI has already exceeded 2%, but the FED's goal is to PCE (type of expenditure inflation, composed not of eg maintenance costs), which is lower. In April, it amounted to 1.6% y/y, in the upper limit of the FED's forecasts for this year, but may be higher (details will be announced on Thursday), so you should pay attention to it.

 

chart 3. Some type of Inflation in U.S.

 

 

trade save,

best regards,

oscarjp