FOMC Release and Market Reaction

The Federal Open Market Committee released their decision to allow the Federal Funds Rate to float between 0% and 0.25% while they once again reduced the amount of monthly asset purchases under QE3 by $10 billion. This was to be expected. Of larger note was the FOMC’s decision to remove a 6.5% Unemployment Rate threshold as guidance for when the Federal Reserve will begin to raise interest rates. There is some commentary suggesting that this leads to confusion. However, I think just the opposite is the case. Given that the Unemployment Rate currently sits at 6.7% and the FOMC is committed to leaving the Fed Funds rate unchanged through at least early 2015, the Unemployment Rate would need to remain where it is (or increase) over the next 12 months for that 6.5% threshold to align with their other guidance. See the chart below as it lays out the FOMC members’ expected year-end Fed Funds rate for the next three years and longer.

20140319ProjectedFedTargets

The bottom line is this: the ending of QE3 and the first rate hike are at least six months and one year away, respectively; and those time frames are data dependent. Equities and fixed income sold off today. Those selloffs can be directly attributed to the FOMC announcement and the Fed Chair’s subsequent press conference. But it was until the final hour of trading did U.S. equities really breakdown.

SPX20140319

The SPX reached a low of 1850.35 (nearly 24 points below its intraday high) but modestly rallied into the close to finish at 1860.77. The SPX is now higher on the year by 0.67% but -1.21% from its all time high on March 7th. Domestic equities continue to plateau.

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