-The U.S. economy
The financial situation in the U.S. came under review when the FOMC meeting minutes were released on Wednesday, April 9. The financial market conditions in the U.S. over the intermeeting period appeared to have been influenced by an easing of concerns about developments in the EMEs, but relatively less affected by the generally weaker-than-expected economic data.
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The U.S. financial conditions remained supportive of growth in economic activity and employment. The expected path of the Federal funds rate was little changed, longer-term yields on Treasury securities edged down, equity prices rose, speculative-grade corporate bond spreads narrowed, and the foreign exchange value of the dollar depreciated slightly.
The Monetary Policy Report and the Fed Chairwoman Janet Yellen’s accompanying congressional testimony in February were seen to emphasize on the continuity of approach, strengthening the expectations that the Fed would continue tapering its asset purchase program by a further $10 billion at each upcoming FOMC meeting.
The asset purchase program by the Fed is intended to provide enough liquidity in the market, so as to keep the Fed funds rate low. Once, the Fed sees the that the economy has recovered and can sustain even if they tighten the liquidity being provided by it in the market, it may start increasing the Fed funds rate. ETFs like the ProShares Short 20+ Year Treasury (TBF), the HOLDRS Merrill Lynch Pharmaceutical (PPH), and the Vanguard Information Tech ETF (VGT), which has its major holdings in information technology companies like Apple Inc. (AAPL) and Google, Inc. (GOOG), can help the investors, as these would generally do well during the early part of a tightening cycle.
Yields on short and intermediate-term Treasury securities were little changed, while yields on longer-term Treasury securities edged down, over the intermeeting period. Measures of longer-horizon inflation compensation based on Treasury inflation-protected securities (or TIPS) also declined somewhat.
Longer-term sovereign bond yields in the advanced economies fell modestly over the period.
The Federal Reserve continued its fixed-rate overnight reverse repurchase agreement (ON RRP) exercise. A reverse repurchase agreement, also called a “reverse repo” or “RRP”, is an open market operation in which the Open Market Trading Desk (the Desk) at the New York Fed sell a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future.The difference between the sale price and the repurchase price, together with the length of time between the sale and purchase, implies a rate of interest paid by the Federal Reserve on the cash invested by the RRP counterparty.
The increases in the interest rate offered by the Federal Reserve in its ON RRP exercise, along with the increases in caps for individual bids contributed to higher levels of activity at daily operations. Reflecting the larger size of the ON RRP exercises and the reduced pace of asset purchases, the rate of increase in the monetary base slowed over January and February.
The next part of this series gives a view on how capital flows and the stock and bond markets behaved during the intermeeting period.