The Federal Reserve Struggles to Communicate

Minutes from the most recent Federal Reserve policy meeting, released Wednesday last week, show the pace of asset purchase tapering is likely to remain consistent.  Taper policy direction appears to be largely agreed upon within the Fed, but disagreements remain over how to properly manage expectations for a policy rate increase (known as “forward guidance”). The original macroeconomic indicator that would supposedly trigger a 25 basis point policy rate increase was a US unemployment rate of 6.5%.  This target has been nearly achieved with surprising rapidity as the participation rate has dropped, yet the employment situation has not substantially improved.  We maintain our view that the Fed will back away from the unemployment rate as a meaningful indicator for policy action. The bottom line is that discussion of policy rate increases, regardless of communication tactic, is itself a positive indicator of economic growth. Interest rates will likely rise in 2014 and bond investors can expect to reinvest interest income at higher rates as the US economic recovery continues.