The Fed
As expected, the Federal Reserve (Fed) announced that it will decrease the monthly pace of bond purchases by another $10 billion, to $45 billion. Treasury purchases will be $25 billion, while mortgage purchases will drop to $20 billion. It’s a good thing the Fed removed the link between the benchmark rate and the 6.5% unemployment target, given that the April unemployment rate dropped to 6.3%.
Yield Curve
The shape of the U.S. Treasury yield curve was virtually unchanged on the month from 3 months out to 2 years, but flatter by 0.06% from 2 years to 10 years. The 10-year Tsy yield declined 0.07% while the 30-year dropped by nearly 0.10%.
Expectations of the Fed raising short-term interest rates remained unchanged last month after increasing the prior month. Fed officials still predict the benchmark rate will rise at least to 1% at the end of 2015 and 2.25% by the end of 2016.
Interesting Observation
Recent employment reports indicate positive momentum as the change in nonfarm payrolls was well above estimates and the unemployment rate dropped to its lowest level since September 2008. The gain in employment for April was 288,000, which is 70,000 above the median forecast of 218,000.
Monthly Wrap-up
As expected, Federal Reserve Chair Janet Yellen announced a $10 billion reduction to the Fed’s quantitative easing program. The move marks the fourth consecutive Fed meeting the program has been cut, leaving monthly purchases of Treasury and mortgage bonds at $45 billion. The FOMC wrote, “Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.”
Economic data continued to be a mixed bag last month as consumer spending and confidence were up, while housing struggled. Mortgage applications were negative in three of the last four weekly reports and housing starts, building permits and new home sales all were weak. If the Fed is right, and economic growth is picking up, we should experience an upward movement in ALI over the coming months.
