WHAT HAPPENED IN THE BOND MARKET YESTERDAY?

March 20, 2014

A surprise from Fed Chair Yellen (see below) caused a large decline in MBS prices this afternoon. No economic data was released today. The Dow is down 110 points. Tomorrow, Jobless Claims, Existing Home Sales, Leading Indicators, and Philly Fed will be released.

As widely expected, the Fed scaled back its bond purchases by $10 billion to $55 billion per month. Fed officials have long maintained that they expect that the fed funds rate will remain near zero for a “considerable period” of time following the end of the Fed’s bond purchases. The big surprise today came during Janet Yellen’s first press conference as Fed Chair, when she defined the meaning of a “considerable period” as about six months. According to Yellen, if the Fed’s economic outlook does not change significantly, the bond purchases are expected to end in the fall of this year. This would place the first fed funds rate hike in the spring of next year. Before today’s comments, the market consensus was for the first rate hike to take place during the fall of next year. The Fed statement also removed the 6.5% Unemployment Rate threshold as a potential trigger for raising the fed funds rate. Instead, the Fed will use a wide range of labor market and inflation indicators to¬† determine when to begin to raise rates. Basically, the Fed’s targets are 2.0% core inflation and “full employment”. With the February Core Consumer Price Index (CPI) at an annual rate of just 1.6%, inflation is well below the Fed’s target, and most signs suggest that considerable slack remains in the labor market. Still, Fed officials expect increases in the fed funds rate to take place sooner than previously expected.

¬†Information provided by “Larry Baer and Market Alert, Inc” via Lynette Conley, Account Executive, Premier Lending

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