The Fed Sticks to Its Game Plan

Despite a persistent increase in global financial market volatility last week, the Federal Reserve continued reducing its bond buying program. This month’s tapering included a further $10 billion reduction in monthly Treasury and Agency Mortgage purchases and was in line with market expectations. While some economists thought the Fed may refrain from continuing to reduce purchases, we believe the Fed primarily focuses on domestic economic data, with the rest of the world, particularly emerging markets, as a secondary input.  The Fed’s statement points to a pick-up in economic activity, improving labor market indicators and stable inflation expectations. These observations are similar to what we are seeing in the economic data points we track closely.  The bond market rallied last week on a “flight to safety” trade, and if the U.S. economy maintains its recent pace of improving growth (4th quarter real GDP growth was +3.2%), the recent drop in yields will likely reverse and grow with the overall domestic economy.