The U.S. dollar is strengthening against the Japanese yen and the yield on the 10 yr. Treasury is surging higher following a more hawkish outlook from the Federal Reserve yesterday as the central bank ends its monetary stimulus program through quantitative easing after signaling an improving labor market and stabilized inflation as reasons to pursue a less accommodative path for the U.S. economy.
Latest economic data released this morning confirms that the U.S. economy is in good shape after 3rd quarter GDP came in at 3.5 percent.
Yesterday the Federal Reserve Committee cited a substantial improvement in the outlook for the labor market since the inception of its current quantitative easing asset purchase program among the reasons to end its asset purchases through quantitative easing after increasing its balance sheet to over $4 trillion since 2008 purchasing monetary assets to help drive interest rates lower.
The Fed statement noted that the outlook has improved with the labor market and “a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.”
Now that the Fed’s quantitative easing program is over, investors are paying close attention to any signals about when the Federal Reserve will begin to increase its federal funds rate which remains slightly above zero.
Based on the language in the Fed’s latest statement, inflation will be closely watched and used as a barometer to help determine when Fed Committee members should begin to hike interest rates at the central bank. Most economists believe that the Fed won’t begin to raise interest rates until mid to late 2015.
Here is an important paragraph from the Fed’s latest statement that addresses a future rate hike:
Notice that the “considerable time” phrase remains in their narrative, leaving the Federal Reserve with more room to gauge future economic data before deciding to hike rates.
“The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”