Why Minneapolis Fed President Kocherlakota disagrees with the FOMC

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Why Minneapolis Fed President Kocherlakota disagrees with the FOMC PART 1 OF 6

The FOMC adopts new forward guidance that affects stocks and ETFs

The FOMC’s new forward guidance

The policy statement following the recent Federal Open Market Committee (or FOMC) meeting held on March 18–19 received diverse reactions from policy makers and the investment community.

Federal Funds Rate

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The key takeaways

The key takeaways from the FOMC statement were:

  • The Fed is on track to finish its bond buying program in the coming months as long as the U.S. economy stays on the path to recovery. For now, Fed asset purchases stand at $55 billion a month, down from the $85 billion before the taper started in December 2013.
  • The Fed decided to drop the 6.5% unemployment rate threshold.
  • The Fed expects to see 2.8% to 3% growth this year, down from its previous estimate of 2.8% to 3.2%.
  • The FOMC could consider increasing the benchmark rate “something on the order of around six months” after ending asset purchases.
  • From its previous forward guidance strategy, the Fed is now seen to take a qualitative guidance approach, wherein it might be less specific about economic targets.

In reaction to the FOMC announcement, the bond markets fell, leading to a yield spike. The increase in the Fed funds rate earlier than expected was the primary reason for the fall. The fall impacted popular bond exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond (JNK), which fell by 0.51% and 0.34% respectively. The Dow Jones industrial average (DJI), which includes companies like Microsoft Corporation (MSFT) and Johnson & Johnson (JNJ), dropped 0.8%.

To find out more about the FOMC and its agenda, see the Market Realist article Janet Yellen to chair her first FOMC meeting this month.

While all other board members of the Fed Reserve voted for the FOMC monetary policy action and the introduction of new forward guidance, Minneapolis Fed president Narayana Kocherlakota voted against the change.

To learn more about the Minneapolis Fed president and his dissent, read on to the next part of this series.


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