The asset purchase program
The FOMC meeting minutes were released on Wednesday, April 9. Participants commented on and discussed different sectors and the economic drivers including the asset purchase program.
At the recent FOMC meeting held on March 18-19, 2014, the members decided that it would be appropriate to make a further measured reduction in the pace of its asset purchases, in the light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program. Members highlighted that the pace of asset purchases was not on a preset course and would remain contingent on the committee’s outlook for the labor market and inflation, as well as its assessment of the likely efficacy and costs of purchases.
Accordingly, the committee agreed that, beginning in April, it would add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. While making a further measured reduction in its pace of purchases, the committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative.
The Fed funds rate
With respect to forward guidance about the Fed funds rate, all members judged that, as the unemployment rate was likely to fall below 6.5% before long, it was appropriate to replace the existing quantitative thresholds with qualitative guidelines. Also, in order to determine how long to maintain the current 0% to 0.25% target range for the Fed funds rate, the committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2% inflation.
The committee further decided that it was appropriate to add language indicating that the committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.
Although changes in the Fed funds rate directly affects the performance of ETFs tracking Treasury securities like the iShares Barclays 1-3 Year Treasury Bond Fund (SHY), the change cascades along the Treasury yield curve, and eventually affects longer-term Treasury tracking ETFs like the iShares Barclays 20 Year Treasury Bond Fund (TLT) even more, on account of their higher duration. However, with the interest rates being low for a while and the market expecting a rise, investors sometimes prefer ETFs that are designed to play rising interest rates, such as the SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN), which tracks floating rate debt of companies like Goldman Sachs (GS) and JPMorgan Chase & Co. (JPM).