Federal Reserve Policy and Targets for Changes

The market perception of future Federal Reserve policy has been mixed and uncertain over the last several weeks as comments by Fed officials about the potential for reducing the current pace of bond purchases seemed to shock the market and cause a rise in interest rates.  5, 10 and 30 year Treasury rates all climbed by similar amounts (48, 58 and 52 basis points) from early May to June 12th.  The selloff was abruptly halted as a WSJ article by Jon Hilsenrath, largely thought to be the media mouthpiece for the Fed, point out that a change in bond purchases was not a sign that the zero short term rate policy was anywhere near coming to an end.  Going into the FOMC meeting this week, all Fed officials are on a public speaking blackout, however, another article from Hilsenrath today reminds investors to refocus on the data.  As we have said before, we are letting the fundamental data guide us.  Based on recent data releases on inflation and employment, there is considerable room before the Fed moves.  The Fed has set a 6.5% unemployment rate as the target for a change from zero percent overnight rates; we are currently at 7.6%.  Inflation and inflation expectations have fallen in recent weeks as well.  With all of the “noise” in the marketplace today, we feel that it is important to take a step back and refocus on the data.