ETF Trends
ETF Trends

The FOMC, the Fed’s monetary policy unit, meets next week on January 28th and 29th. It will be Ben Bernanke’s last meeting and the beginning of Janet Yellin’s leadership of the central bank.  No immediate change in Fed policy is likely – winding down QE3 over the next few months as announced in December will continue, the Fed funds rate target won’t shift from its current zero to 25 basis points and the yield on the ten year Treasury note won’t rise by much.

While there won’t be an immediate shift, the membership of the FOMC will change and a review of the economic outlook and monetary policy is likely at this meeting.  The changes to the FOMC include the usual rotation of the four representatives from among 11 of the 12 regional banks as well as two recently nominated members of the Fed Board of Governors.

What will the new year and new members bring?

Tapering and the end of QE3 are expected in 2014.  The quantitative easing programs were successful in lowering intermediate and long term interest rates and boosting the stock and housing markets. However, with the economy better off than it was a few years ago and questions heard about the additional benefits of further bond buying, this effort is likely to fade away.  Despite fears voiced by some, the program did not create inflation.  In fact, inflation at about 1.5% is below the Fed’s target and deflation is seen by some analysts as a larger worry for 2014.

With the end of QE1-2-3, the Fed’s policy making tools will focus on interest rates, forward guidance or announcements of future policy and possibly some of the Fed’s banking regulations.  The target for the Fed funds rate is likely to stay at zero to 25 basis points well into 2015 if not longer.  This will keep a lid on the yield on the ten year Treasury note, even if economic growth exceeds expectations. The ten year yield can be thought as the average of the ten successive one year returns.  With assurances that the one year returns won’t rise much in the next two or three years, the longer 10 year number is likely to be somewhat contained.

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