Must-know: The financial situation under review—June FOMC

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The financial situation

On June 17-18, the Federal Open Market Committee (or FOMC) staff reviewed the financial situation for the time period since they last met in April. On balance, financial conditions in the U.S. remained supportive of growth in economic activity and employment. During the inter-meeting period—April to June—the staff observed that the path of the Federal funds rate was slightly lower in the long run, yields on longer-term Treasury securities moved down modestly, equity prices increased, corporate bond spreads narrowed, and the foreign exchange value of the dollar changed slightly.

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The Federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Changes in the Fed funds rate are reflected in the performance of exchange-traded funds (or ETFs) tracking Treasury securities like the iShares Barclays 1–3 Year Treasury Bond Fund (SHY) and the iShares Barclays 20 Year Treasury Bond Fund (TLT). However, with the interest rates been low for while and the market expecting a increase, 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).

 

Treasury yields

While yields on short- and medium-term nominal Treasury securities increased slightly over the inter-meeting period, yields at the long end of the curve edged lower, continuing a downward trend evident over much of this year.

Stock markets

Broad stock market indices were boosted by a more optimistic assessment of near-term economic prospects, and supported by continued low interest rates.

Credit flows

Credit flows to non-financial corporations remained strong. Amid low yields and reduced market volatility, gross issuance of investment and speculative-grade bonds rebounded in May. Commercial real estate and industrial loans on banks’ balance sheets increased and issuance of leveraged loans remained strong. Conditions in consumer credit markets were solid in recent months, boosted by credit card loans, student loans, and auto loans.

Mortgage credit

Mortgage credit conditions generally remained tight, although further incremental signs of easing emerged amid continued gains in house prices. Mortgage interest rates declined somewhat more than long-term Treasury yields over the inter-meeting period. Both mortgage applications for home purchases and refinancing applications remained at very low levels.

After reviewing the economic and financial situation, the FOMC staff went on to provide their outlook for the U.S. economy. The next section in this series discusses the U.S. economic outlook.

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