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10:00 am ET
May 7, 2014 BANKING
Five Takeaways From Fed Chairwoman Janet Yellen’s Testimony
U.S. EconOMY
Federal Reserve Chairwoman Janet Yellen more or less sticks to the script in her prepared testimony before the congressional Joint Economic Committee Wednesday. She, for the most part, reiterated the views expressed by the Fed’s policy-making committee at its most recent meeting last week, though she hits harder on concerns about the slowing recovery in the housing market than the full group did. Here are five quick takeaways from those prepared remarks (her words in italics):

1) Ms. Yellen’s testimony makes clear that the Fed isn’t overly concerned about the dismal growth numbers that came in for the first quarter. “Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter.”

2) She does, however, sound a louder warning bell on the slowdown in the housing market than the Fed committee did last week. She highlights her worries about housing in two separate sections of the testimony: “One cautionary note, though, is that readings on housing activity – a sector that has been recovering since 2011 – have remained disappointing so far this year and will bear watching.” And later, underscoring the uncertainty of her upbeat outlook for the economy, she pointed to housing again: “Another risk – domestic in origin – is that the recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.”

3) Ms. Yellen also touched on the risk that the situation in Ukraine could pose to the world economy, though she doesn’t specifically reference the country, saying that “one prominent risk is that adverse developments abroad, such as heightened geopolitical tensions or an intensification of financial stresses in emerging market economies, could undermine confidence in the global recovery.”

4) It comes as no surprise, but Ms. Yellen still sees a lot of slack in the economy: “While conditions in the labor market have improved appreciably, they are still far from satisfactory … [B]oth the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly—another signal that a substantial amount of slack remains in the labor market.”

5) Finally, Ms. Yellen swats down a list of concerns that the Fed’s policies could be fueling bubbles or other threats to financial stability, and touted the better liquidity and capital positions of the nation’s biggest financial firms. She said that while there is some evidence of investors reaching for yield, nothing has gotten too crazy: “While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date – particularly at the largest banks and life insurers. More generally, valuations for the equity market as a whole and other broad categories of assets, such as residential real estate, remain within historical norms…. For the financial sector more broadly, leverage remains subdued and measures of wholesale short-term funding continue to be far below levels seen before the financial crisis.”

US economic growth may not be clear for months: Fed official

DUBAI — The United States economy will probably start picking up in the second quarter towards an annual rate of about 3 per cent, but it may not be clear for some time if it is on a sustained path, a top official at the Federal Reserve said yesterday.

“It may not be clear for several months, or even quarters, whether the US economy is undeniably on a stronger and sustained growth path around a run rate of 3 per cent,” Mr Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told a business gathering in Dubai.

Mr Lockhart, who said he was speaking in his personal capacity, does not have a vote this year on the central bank’s policy-setting board, but he participates in its discussions. He is considered to be near the centre of the Fed’s policy spectrum and his comments often reflect the views of the core decision-makers.

The Fed has kept overnight interest rates near zero since late 2008 to help the US economy recover from a deep recession. Signs of recovery in the job market led the Fed to start winding down its bond-buying programme, which is aimed at pushing down borrowing costs.

However, dissatisfied with the US recovery, the Fed is still adding US$45 billion (S$56.2 billion) in bonds each month, though the purchases should end later this year. “I expect this programme to be completely phased out by October or December this year,” Mr Lockhart said.

At its last policy meeting on April 30, the Fed stuck to its assessment that the economy would need near-zero interest rates for a “considerable time” after the asset purchases end. “Based on my outlook, I think conditions in the US economy will justify beginning the process of raising rates in the latter half of 2015. Once rates begin to rise, I expect the process to normalisation of interest rates to be gradual,” Mr Lockhart said.

Inflation has been running just above 1 per cent in the world’s No 1 economy, while unemployment, albeit falling, is still elevated at 6.3 per cent.

However, Mr Lockhart said despite the decline in the unemployment rate last month, the US apparently added jobs but lost workers.

“So, I am hesitant to take on board this decline in the unemployment rate as indisputable evidence of progress towards full employment,” he said.

US 'doing better than people think'

Vesna Poljak
1073 words
14 May 2014
The Australian Financial Review
Copyright 2014. Fairfax Media Management Pty Limited.
The chief executive of one of the world's biggest fund managers believes company profits in the United States will keep growing faster than the world's biggest economy as the benefits of cheaper energy costs, productivity gains and the housing recovery come through.

Jim McCaughan from Principal Global Investors, which oversees more than $US300 billion ($320 billion) in assets, said that "data hawks" who look at the aggregate economy are missing the fact that the private sector is doing well.

"I was at a client meeting a few weeks ago and there was a guy from North Carolina saying, 'Sure, Chinese labour is cheaper than ours, but we've got cheaper energy and productivity'," the New York-based investor said on a visit to Melbourne on Tuesday.

"Corporate profits in the US will continue to grow faster than the economy, and I point to continuing productivity, relatively cheap energy and the sustainability of the housing market. It's really those three factors which mean that the US private sector economy is doing better than most people think."

Mr McCaughan described the price advantage achieved from the US energy boom as "pretty extreme".

"This is underestimated by many commentators. It's not just a bit cheaper," he explained, citing a market price of as low as $US4.50 for a unit of natural gas, which would cost $US16 sourced from Qatar or Russia.

For investors, who have witnessed the S&P 500 barely move in 2014, he advocates staying "up to weight" US equities. Indeed, if it were not for the geopolitical risk sparked by military action in Ukraine, he thinks the S&P 500 would probably be 5 per cent higher by now.Impact of cold weather

Economists were surprised by the extent of the impact of unseasonably cold weather on the US economy, which was still evident in first-quarter company earnings manifested in different ways.

"If you look for example at the Ford results that came out, they had a significant extra charge for transport because of the adverse weather conditions," Mr McCaughan said. "It shows that the impact of the bad winter was a lot more widespread and was a lot more than slowing down construction."

US growth will be around 3 per cent in 2014, he believes, and further improvements in payrolls will emerge.

Principal does not see 10-year Treasury yields – the benchmark for the cost of borrowing in the US – spiking as the unwinding of the Federal Reserve's stimulatory policy runs its course.

This is a persistent concern for some bond experts.

"I'm not one of those people who expect disruption amid the unwind of QE," Mr McCaughan said. "I don't think they're going to be actively selling [assets purchased under QE]. However, I think what they're going to do is let the bonds mature and run it down slowly that way."

He does not expect a quick rise in the 10-year yield, because this would pose an enormous concern for the Fed for its ramifications for the housing market. "A 10-year yield at 2.5 [per cent] means that a 30-year mortgage is 4 [per cent] in change. But if you got to a 4 per cent yield . . . that will hurt."

Another factor working in favour of US equities is that protracted and painful market downturns tend to be followed by longer recoveries.Alibaba IPO

Capital markets in the US are ­booming, which has paved the way for the biggest initial public offering yet – the float of Chinese e-commerce group Alibaba.

Mr McCaughan said the move to take Alibaba public in the US, and not pursue a Chinese listing, suggested the fact that China still had a long way to go to match the US for depth in capital markets. Indeed, he did not think that last week's moves by China's state council, pledging everything from increased foreign investment in Chinese companies to local government bond issuance, would be enough to offset the macro themes that dominate the investment case for Chinese equities, which have underperformed in 2014.

"For Chinese equities there's a lot of other things. There's the very short-term volatile nature of the market . . . The path China's on is clearly towards liberalisation but it's going to be very slow," he said.

"Mostly what people want China for is the domestic growth and it's the domestic economy that's slowing down – that will be a different incentive," attracting value investors potentially. "There's not many multinationals based in China, look at Alibaba – the plan to list in the US is very interesting."

There was no escaping that China is still an emerging market and that brings with it characteristics of volatility too, he added.

"To me it's too early to really go wholeheartedly into emerging markets. The thing I would point to also in China is [in] the last two years the ­economy has been kept going by very fast credit expansion – that's about to run its course."

Brazil is equally vulnerable to a slowing of credit growth, he believes, and "they're arguably having a harder landing than China". But with a long-term view, he thinks this is a good time to accumulate emerging markets ­exposure. Mr McCaughan has worked on the buy side since the 1970s and found himself in the headlines four years ago when he commented that high-frequency trading was akin to "structured front-running".

He is encouraged that high-frequency trading is again in the spotlight, thanks to the publication of Michael Lewis's Flash Boys, which has divided opinion on the case for high-frequency activity. Lewis himself takes a dim view of the practice.

Mr McCaughan notes: "I think the narrative in Michael Lewis's book is about 80 per cent accurate. I totally disagree with some of his conclusions however . . . what the front running does is make the market more clunky and expensive to use than it should be, but I don't think it's rigged," he said.

And even though Boomerang is his favourite of Lewis's popular books on financial markets, "Flash Boys will be a pretty good movie too, in due course".READ NEXT: US government on track to slash deficit US bonds advance as Yellen stays dovish

Fairfax Media Management Pty Limited

Document AFNR000020140513ea5e00040


Fed Panel Has Begun to Address How to Gradually Raise Rates

Federal Reserve officials have gingerly begun to take on what will be their most difficult task over the next 12 to 24 months: determining how and when to gradually raise interest rates and return monetary policy to a more traditional path, even as they keep trillions in assets accumulated during the huge stimulus efforts of the last five years.

Officials at the central bank are not anywhere near a final decision on tactics and strategy, nor do they have a definite date in mind, although most experts expect them to take their first step in raising short-term interest rates in mid- to late 2015.

But the minutes of their meeting late last month, released on Wednesday, detail how the members of the Federal Open Market Committee, which consists of representatives of the Fed’s regional banks and the Washington-based Board of Governors, have begun grappling with lifting the interest rate that the Fed uses as its major policy tool from a current level close to zero.

“Obviously, it is still a work in progress,” said Michael Hanson, senior economist at Bank of America Merrill Lynch. “The market anticipated more detail.”

Nonetheless, the minutes suggested that the process is well underway. “This discussion marks the beginning of the post-crisis era,” he said. Mr. Hanson said that holding all those assets on the Fed balance sheet means huge reserves are sitting idle in the banking sector, which in turn makes it much more difficult to raise short-term rates using traditional tools when the Fed finally does decide the time is right to tighten monetary policy.

At the April meeting, policy makers reviewed staff presentations that “outlined several approaches to raising short-term interest rates when it becomes appropriate to do so,” the minutes said.

“Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted,” the minutes said.

The central bank is keeping its options open on how to go about what is one of the most delicate tasks facing Janet L. Yellen, the new chairwoman of the Fed.

“I think the minutes revealed that they don’t know their game plan yet,” said Diane Swonk, chief economist at Mesirow Financial in Chicago and a longtime Fed watcher. “There are still a lot more questions than answers.”

Even as signs are emerging this spring that economic growth is beginning to pick up after a very slow first quarter, the recovery remains fragile. And if rates rise more quickly than expected, there are fears inside and outside the Fed that the already-slowing housing sector could weaken further.

At the meeting on April 29 and 30, Fed officials were guardedly optimistic about an economic rebound, but remained concerned about weakness in the housing market and persistently low inflation, according to the record of their meeting.

They continued to unanimously support the gradual scaling back of monthly bond purchases aimed at stimulating the economy, in part because most officials said they believed economic growth “picked up recently, following a sharp slowdown during the winter due in part to unusually severe weather conditions.”

At the same time, the minutes of the April meeting showed that the committee members were concerned that “inflation was running below the committee’s longer-run objective and was seen as posing possible risks to economic performance.”

Figures released last week indicated inflation might have increased in April to healthier levels not far from the Fed’s 2 percent, but that data was not yet available when the policy makers met.

At the meeting, “most participants commented on the continued weakness in housing activity,” citing factors like higher home prices, construction bottlenecks from a shortage of labor and harsh winter weather, as well as tight credit. The housing sector, which imploded in the years before the financial crisis and recession, has rebounded strongly in recent years, but those gains have been fading as borrowing rates for home buyers rose in the second half of 2013.

Over all, the minutes did not reveal any sharp change in strategy.

In a separate development, the Senate confirmed the nomination of Stanley Fischer, a longtime central banker, as a Fed board member. Mr. Fischer is to become Fed vice chairman after a second formal vote, expected soon, allowing him to take the job Ms. Yellen held before she became chairwoman.

The Fed has been operating short-handed as departures and the slow confirmation process left three vacancies on the seven-member board. Another governor, Jeremy C. Stein, is to step down next week. Lael Brainard, a former Treasury official, is also expected to win confirmation, but it is not clear when that vote will occur.

The next meeting of Fed policy makers is set for June 17 and 18.
Fed covers all the bases on monetary policy

Baker Philip Baker
572 words
23 May 2014
The Australian Financial Review
Copyright 2014. Fairfax Media Management Pty Limited.
Philip Baker

The US Federal Reserve has an alphabet soup of financing facilities and so for investors trying to understand what's happening it's like having a second language. But it is getting complicated.

Prior to the global financial crisis the debate was normally over whether the economic recovery would be in the shape of a V, U, W or even a square root symbol, with some talk about a J-curve thrown in for good measure.

Then we got acronyms like QE (quantitative easing) and LTRO (long-term refinancing operations), as central banks became the dominant players in global financial markets, dictating all the ebbs and flows.

Now we have TDF, RRP and IOER. Or for those that aren't bilingual, the term deposit facility, the reverse repurchase agreements and interest on excess reserves.

Those three acronyms just happen to be a large part of the latest strategy that the Fed has signalled it will use when it starts to get interest rates back to more normal levels.

Not that it's going to happen anytime soon.More information offered

But the latest minutes from this month's meeting show that the members of the Federal Open Market Committee have all bases covered.

The FOMC even wants to give investors more information about how the Fed is going to dismantle its balance sheet that has blown out to more than $US4 trillion since the GFC.

The committee also want to make it very clear what happens when all the US Treasuries on the balance sheet mature and how the principal payments on MBS will be reinvested. That's mortgage backed securities on the balance sheet.

The main message however was how the Fed, eventually, is going to get monetary policy back to normal when banks have trillions of dollars of excess reserves.

In the past, the Fed would just take away a small amount of those reserves and then rates would go up. But that's not going to work in the world investors live in now.

That's where TDF, RRP and IOER come into it.

All are new measures and no one is quite sure how they will work so the Fed will roadtest them before launching them, but if they have one thing in common it is all about giving the Fed more control over interest rates.

The Fed is about to embark on a program that enables the banks to park money with the bank for seven days, that's the term deposit, at 0.25 per cent, which is at the top end of its current policy rate range.

This keeps the money away from the overnight market that dictates the Fed funds rate and is a way of soaking up the excess reserves.

The IOER right now pays 0.25 per cent so is a little sidelined by the seven day deal. Some analysts say the RRP is the better option for the Fed.

It, too, is a way of soaking up extra cash, but this time it's not from the banks, but from government agencies such as Freddie Mac and Fannie May that have as much as $US24 billion in cash and money market funds, with $US2.6 trillion in assets, that can't use the seven-day deals.

This money attracts a rate of 0.05 per cent.

Fairfax Media Management Pty Limited

Document AFNR000020140522ea5n0000i
3 sharp bear years and 7 grinding bull years...

Finally! Job market returns to 2008 peak

By Annalyn Kurtz @AnnalynKurtz June 6, 2014: 10:23 AM ET
jobs report data 060614
It took two years to wipe out 8.7 million American jobs but more than four years to gain them all back.
That's according to the Department of Labor's latest jobs report, which shows the U.S. economy added 217,000 jobs in May. With that job growth, there are now more jobs in the country than ever before.
The last time we were near this point was January 2008, just before massive layoffs swept throughout the country, leading the unemployment rate to spike to 10%. The unemployment rate is unchanged at 6.3% for May, and much has improved since the worst of the crisis.
Related: Happy to have a #newjob
Yet, this isn't the moment to break out the champagne. Given population growth over the last four years, the economy still needs more jobs to truly return to a healthy place. How many more? A whopping 7 million, calculates Heidi Shierholz, an economist with the Economic Policy Institute.
As of May, about 3.4 million Americans had been unemployed for six months or more, and 7.3 million were stuck in part-time jobs although they wanted to work full-time. Both these numbers are still elevated compared to historic norms, and are of concern to Federal Reserve officials, who will meet in two weeks to re-evaluate their stimulus policies.
Overall, this has been the longest jobs recovery since the Department of Labor started tracking jobs data in 1939. Economists surveyed by CNNMoney predict it will take two to three more years to return to "full employment," which they define as an unemployment rate around 5.5%.
Related: The American Dream is out of reach
I worked in finance. Now I'm a nurse
I worked in finance. Now I'm a nurse
These jobs are still missing: The jobs that have been created over the last few years are not necessarily the same ones that were lost. Blue-collar jobs in manufacturing and construction accounted for about half of all the positions lost in the crisis, and they've been painfully slow to return.
States that were hardest hit by the housing bust, like Nevada and Arizona, have had the slowest comebacks and still haven't fully recouped all the jobs they lost.
These are the jobs we've gained: States like North Dakota and Texas have come out well ahead of the pack. North Dakota has 30% more jobs now than it did in early 2008, and Texas has 9% more jobs than it did back then.
Nationwide, industries like health care, professional services and leisure and hospitality have not only recovered, but are at all-time highs for jobs. Whereas low-wage jobs dominated the first part of the recovery, now middle wage jobs appear to be growing as well.
Related: The economic recovery in 17 charts
Justin Hirsch, president of JobPlex, specializes in recruiting mid-level managers and young executives for companies like Microsoft, Amazon and Facebook. Over the last year, he's seen an increase in top companies looking for human resources managers -- which could be a good sign of more job growth to come.
"The labor market, from our perspective, seems to be improving," he said. "If anything, corporations are very hungry for great talent."
instagram new job mosaic
Did you land a new job? Share your photo with CNNMoney on Instagram by using the hashtag #newjob.
New grads from the class of 2014 may face a better job market, but they'll also be competing against workers whose careers have taken a detour over the last few years.
"Will employers have the patience for the individual who had to disrupt their career path over the last few years? Or will they just go back to hiring fresh grads?" said Rich Thompson, chief human resources officer, for Adecco Group North America. "It's going to be really interesting to see."
First Published: June 6, 2014: 8:34 AM ET
Fed says rate rises in 2015-16 now more likely

FEDERAL Reserve officials fine-tuned their interest-rate projections and announced further reductions in their monthly bond purchases, leaving the program on course to end later this year.

With the bond-buying program winding down, officials are increasingly turning their attention to the question of when to start raising short-term interest rates from near zero. Officials indicated they expected short-term rates to remain there through the year. New interest-rate projections released by the central bank suggest officials see rates rising slightly more than previously forecast in 2015 and 2016, though not as much in the longer run.

The Fed’s benchmark federal funds rate has been slightly above zero since December 2008.

“Growth in economic activity has rebounded in recent months,” the Fed said in a policy statement at the conclusion of a two-day policy meeting, citing an improving job market and resumed growth in business investment.

The Fed’s latest tint of optimism about the economy follows a dismal first quarter in which the economy contracted, forcing officials to reduce their projection for economic growth this year. The Fed now forecasts that the economy will expand 2.2% this year, substantially slower than a projected growth rate of near 3% offered last March.

Fed chairwoman Janet Yellen, at a news conference after the Fed meeting, said there are “many good reasons” to expect faster growth in 2015 and 2016, including an improving labor market, the Fed’s easy credit policies, reduced household debt burdens, rising stock and home prices and an improving global economy. She said she also expects consumer spending to pick up in part due to rising wages.

With the economy showing signs of getting back on track, the Fed said it would wind down the monthly pace of mortgage and Treasury bond purchases by another $US10 billion starting in July, to $US35 billion a month.

The Fed also forecast the benchmark federal-funds rate would, on average, rise from near zero today to 1.2 per cent by the end of 2015 and 2.5 per cent by the end of 2016, up from average estimates of 1.125 per cent in 2015 and 2.4 per cent in 2016 when the Fed last projected rates in March.

On inflation, Ms Yellen said recent data have been “a bit on the high side,” but generally provide evidence that price levels are moving back toward the Fed’s 2 per cent target.

Fed officials see the jobless rate falling more than previously thought — from the current 6.3 per cent to 6 per cent or 6.1 per cent by year-end and then to the mid-5 per cent range in 2015 and low-5 per cent range in 2016. Those represented downward revisions from March and suggest the Fed sees less slack in the economy than previously thought, which could help explain the slightly higher near-run interest rate projections.

However, the Fed is a little less optimistic about the longer-run outlook for economic growth. Officials said the economy’s annual growth potential might be as low as 2.1 per cent in the long-run, the latest in a string of downward revisions made in recent years. That gloomier long-run growth outlook could help explain why the central bank is forecasting a lower long-run interest rate of 3.75 per cent.

No officials dissented for the second straight policy meeting this year under Ms Yellen.

Additional reporting: Ben Leubsdorf and Michael S. Derby

Dovish Fed pushes back on rate hike speculation
Patti Domm | @pattidomm
1 Hour Ago

A dovish message from the Fed Wednesday sent buyers into both bonds and stocks, as markets took some reassurance that while its bond buying is ending, the Fed will move slowly to raise interest rates.

The minutes from the Fed's June meeting revealed it would end its quantitative easing program by October, and that while it has no date to raise rates, it has been working on details of a plan to return to normalcy.

"There was nothing new in it," said Peter Boockvar, chief market strategist at Lindsey Group. "They were just reiterating the same dovish message." Boockvar noted, however, that the Fed did not have the June jobs report when it met, and that report may have given it more confidence in the jobs outlook.

"There's nothing in here to change the consensus assumption regarding rate hikes, which center on the middle of next year," said Daniel Greenhaus, chief global strategist at BTIG.

"They're clearly in a position where at least right now, they're inclined to let this thing run a little further, to take out some insurance. Given how long we have under performed, if you're the Fed and you view things the way they do, what's the harm in going a little further?"

Market focus now shifts to Fed Chair Janet Yellen's testimony before Congress next week, and the comments of other Fed officials on the speaking circuit.

Read MoreFed minutes: QE likely to end with $15 billion in October
On Thursday, Fed Vice Chairman Stanley Fischer will speak at 4:30 p.m. (EST) on financial sector reform at a conference hosted by the National Bureau of Economic Research. There are also jobless claims data at 8:30 a.m. and wholesale trade at 10 a.m.

The bond market has been beginning to wager, particularly after that jobs report, that the Fed would move sooner than it expects to hike rates. The two-year yield reached a three-year intraday high of 0.53 percent, while the long end held in its recent trading range.

This so-called "curve-flattening trade" was viewed a sign the market was sensing the Fed may have to become less accommodative because of an improving economy. Boockvar noted the yield curve remained flat even with the big move lower in yields post-Fed minutes.
Jeff Rosenberg, chief investment officer of fixed income at BlackRock, said the two-year yield had been moving on the idea the economy is improving enough to force the Fed to hike rates.

"The data is showing evidence that they're closer to the attainment of their dual objectives," he said earlier Wednesday. The two-year yield backtracked to 0.48 percent after the Fed release.

Rosenberg said he believes the Fed should move to raise its target Fed funds rate from zero by the first quarter. The Fed has had a soft target of 6 percent unemployment and a 2 percent inflation rate.

Read MoreWill the Fed fuel more volatility?

Fixed income experts expect to see a continued tug of war in the market, reflecting the diverging views on Fed interest rate policy, particularly if economic data improves.

"I think this will contribute to an increase in volatility, all else being equal. There's a divergence in opinions around the Fed exit, and the various implications of that will increase volume. To what degree, I don't know," said Gregory Peters, portfolio manager at Prudential Financial.

The June jobs report added juice to the recent selloff of the short end of the curve, as traders viewed the solid employment gain of 288,000 and unemployment rate of 6.1 percent as a sign the labor market is on the mend. However, the number of long-term unemployed remains high, and the 63.8 percent participation rate is still at a post-recession low.

"The concern is the short-term unemployment rate is the better measure of slack, and policy is too accommodative," Rosenberg said. That could lead to concern about financial complacency and financial stability longer term if the Fed stays on hold for too long, he said.

In the minutes, it noted that Fed officials discussed "whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions."

A changing forecast

Following the June jobs report, some economists moved forward their expectations for when the Fed will start raising rates. Goldman Sachs economists, for example, changed their forecast from the first quarter of 2016 to the third quarter of 2015.

J.P. Morgan economists also expect a third-quarter, 2015 rate hike. In a note Wednesday, they said the gap between lowering the short- versus the long-term unemployment rate is quickly narrowing.

"The debate as to whether short-term unemployment or total unemployment is more important from an inflation perspective really heated up at the beginning of the year. At that point the disconnect between short-term and long-term unemployment was quite wide," they noted.

The economists said since then, the divergence has narrowed with the short-term unemployment rate at 4.1 percent in June from 4.2 percent in December but a market larger drop from 2.5 percent in the long-term rate in December to 2 percent in June.

They also noted that long-term joblessness, while still elevated, accounted for more than 90 percent of the decline in unemployment since December.
The Treasury auctions $13 billion of reopened 30-year bonds Thursday after Wednesday's auction of $21 billion in 10-year notes Wednesday afternoon was met with a tepid response. The yield of 2.59 percent was the lowest in three years.

Ian Lyngen, senior Treasury strategist at CRT Capital, said the auction was weak, as expected as investors anticipated the Fed minutes, released an hour later. But after the Fed minutes, the 10-year yield fell back to 2.55 percent.
Fed funds futures also moved Wednesday, and after the Fed minutes, rates were slightly lower. They imply a rate of 0.55 percent by September, 2015 and 0.78 percent by December, 2015.
The median forecast of Fed officials is that rates will be 1.2 by the end of next year and 2.5 percent by the end of 2016.
"I think that's going to be the tension in here. I think as the data come in a little stronger and inflation comes in just a little higher, I think the markets are going to be just a little more skittish, and I think that's what you're seeing," Peters said. "I do not personally believe they're behind the curve. But that's the tension in the market and that's going to be a source of volatility in the market. It's showing up in the front end."
The real barometer

Peters said the issue isn't really when the Fed starts raising rates, but more so the pace of change and what the rate will be by the end of next year.

"From an investment standpoint, it matters more where it ends up. It's a time when investors have become accustomed to a highly accommodative policy, so a move in the opposite direction matters," Peters said. "What history tells you is once they move, they continue to move, so it's a progression. I think the hair-trigger response from the market is one thing, but from an investment standpoint that's infinitely more important."

Peters said the price action makes sense from the perspective that the long end of the curve is attractive when compared to other sovereigns in Europe and Asia. He said the Fed has already been tightening as it tapers its quantitative easing bond buying, but he doesn't believe the market will react the way it has in the past to tapering. Peters also points out the action this time is in the front end of the curve.

"Either way, you're getting closer to the Fed doing something than further away. I do think the Fed and (Fed Chair Janet) Yellen believe inflation isn't a problem. They want to get growth up. There's still slack," he said, adding the Fed will stress that rates stay lower for longer.

"Ultimately, the market's really going to push on that and the Fed's job is going to be a little more difficult here for the next couple months, given the rebound from the first quarter and the weaker inflation prints rolling off—and the market's going to test," said Peters.

While the CPI has shown consumer inflation running at 2 percent year over year, the Fed's preferred measure, personal consumption expenditures, is still lagging.

—By CNBC's Patti Domm
The latest update on Fed QE. Two months earlier than the previous anticipated year-end ending...

Fed sees stimulus exit in October
10 Jul 2014 06:52
[WASHINGTON] The Federal Reserve plans to end bond purchases in October, winding up a five-year stimulus effort to support the US economy, central bank June meeting minutes showed Wednesday.

Participants of the June 17-18 Federal Open Market Committee meeting saw the economy rebounding from a weak first quarter, largely blamed on bad weather.

"If the economy progresses about as the Committee expects... this final reduction would occur following the October meeting," the minutes said.

Though the Fed previously has indicated it would end asset purchases by year-end, this was the first time an explicit month has been named. Most Fed-watchers had expected the buying to end in October.
Source: Business Times Breaking News
Fed fears risks posed by exit tools; plan almost done

U.S. Federal Reserve Chair Yellen delivers remarks at the inaugural Michel Camdessus Central Banking Lecture at the International Monetary Fund in Washington. Photo: Reuters
PUBLISHED: 6:15 AM, JULY 12, 2014UPDATED: 7:43 AM, JULY 12, 2014
JACKSON HOLE Wyoming - Federal Reserve officials are cautiously nearing completion of a new plan for managing interest rates, concerned that some of the new tools they are likely to rely on could pose unintended risks in a crisis.

The central bank has devoted extensive debate to the matter over the past two months and officials "have made a lot of progress" on a strategy to return monetary policy to a more normal footing after years of coping with crisis, Chicago Federal Reserve Bank President Charles Evans said on the sidelines of an economic conference here.

However, the sheer magnitude of the amounts of money used to combat the crisis - $2.6 trillion sitting at the Fed as bank reserves and $4.2 trillion held by the Fed in various securities - may complicate the U.S. central bank's ability to control its target interest rate once the decision is made that it should be raised. A decision to begin increasing interest rates is expected in the middle of next year.

In recent weeks, the Fed has neared consensus that its workhorse tool will be the interest it pays banks on excess reserves on deposit at the Fed - giving the central bank a direct way to encourage banks to either take money out of circulation and leave it at the Fed, or lend it elsewhere.

Another tool would have a similar impact but apply more broadly, using overnight repurchase agreements that would let money market funds and other institutions as well as banks essentially make short-term deposits at the Fed.

The worry is that if financial conditions tighten, those large funds of money would flee to the repo facility as a safe haven, depriving the economy of credit and making a potential crisis even worse.

"The broad concern is whether we want to facilitate what could be a period of financial stress by providing in a large or unlimited way that refuge, and whether that would tend to exacerbate a financially stressful situation," said Atlanta Fed President Dennis Lockhart.

The concern is apparently widespread at the central bank. Minutes of the Fed's June policy committee meeting said that "most participants" shared worries about the "unintended consequences" of the repo facility and its potential to be used as a shelter from risk.

Still, the repo tool, which is being tested by the New York Fed, is expected to form part of the new exit strategy, although it is likely to be in what Lockhart described as a "supporting role." The minutes from the Fed's June meeting said that restrictions could be placed on the use of the repo tool to limit the potential risks.

Lockhart said a completed exit policy could be formally announced as early as this fall. The federal funds rate, which is the rate that banks charge each other for overnight loans, will remain part of the central bank's tool kit. But it is not expected to play the main role it has in the past because banks with rich reserves don't rely on that market as much as they used to for overnight funding. REUTERS
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