KNOWLEDGE CENTER

Knowledge Center Archive

Jun
25
2012

Podcast: May 2012 Federal Open Market Committee

By Sean P. Simko

The FOMC left the lending rate unchanged and also announced the extension of “Operation Twist” through the end of the year. The statement noted that “the Committee intends to purchase Treasury securities with remaining maturities of six years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately three years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.”

SHOW/HIDE TRANSCRIPT

Welcome, my name is Sean Simko. I am Managing Director of SEI Fixed Income Portfolio Management. Today’s commentary will focus on the June meeting of the Federal Open Market Committee, or FOMC, including the release of the Committee’s statement and the market’s initial reaction.

The FOMC concluded its scheduled meeting on Wednesday and, as expected, left the lending rate unchanged, holding it in the range of zero to 25 basis points. It also announced the extension of “Operation Twist” through the end of the year. The statement noted that “the Committee intends to purchase Treasury securities with remaining maturities of six years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately three years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.”

The Fed’s statement also had a dovish tone. It would have been shocking if there was not some type of a downgrade due to heightened global worries in conjunction with what seems to be a stalling labor market within the U.S. economy. However, the Fed provided investors with a sense of comfort by saying that it is willing to act if necessary.

Ongoing speculation regarding the need for additional accommodation flared up in recent weeks after May’s dismal labor report. The main question on everyone’s mind is this: If needed, when does the Fed toughen up and use its (possibly last) bullet? The Committee has done a fine job of managing investor expectations thus far, and its efforts to stimulate economic growth have been admirable. Unfortunately, the Fed alone is not able to solve the growth side of the economic equation—the fiscal side needs to become engaged as well.

Prior to the statement release, the Treasury market was trending lower in price. The sector reversed course in response to the Fed’s statement and comments, which provided the ammunition for a flatter curve as the Fed is selling the three-year sector. The two-year/10-year flattened a couple of basis points to 1.33%. The 10-year yield fell to 1.63%. The front end of the curve was little changed, as it is still anchored by Fed activity; the two-year closed at 29 basis points.

The economic picture remains tenuous at best. Concern about the sustainability of the first quarter’s move higher is starting to become justified. Commodity inflation, which Chairman Ben Bernanke has viewed as transitory, is in the process of subsiding. At this point, we maintain the view that the economy is growing, albeit at a tepid pace. We also expect volatility to remain present as investors continue to dissect the risks and potential outcomes of ongoing threats posed by the resurgence of European headlines and geopolitical events.

If you have any questions regarding this podcast or the markets, please contact your SEI representative.

 

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

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SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here.

SEI Fixed Income Portfolio Management is a unit of SEI Investments Management Corporation, which serves as the investment advisor.

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