Gradual economic growth and little progress in the unemployment rate convinced members of the Federal Open Market Committee to continue with monthly Treasury purchases of $85 billion and to keep the federal fund rate at zero to 0.25%, according to a statement from the first two-day meeting of 2013.
The monthly purchases of $40 billion in agency mortgage-backed securities and $45 billion in longer-term Treasury securities “should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative,” according to the statement issued Wednesday. “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate.”
This week's decision to stand pat was a sharp contrast from December when the Federal Reserve announced it would switch from a calendar-based approach to one driven by changes in the unemployment rate or other indicators, according to the FOMC. “What the Fed did then was a pretty big deal, but there wasn't a lot that's happened since then. It was widely expected to be a yawner, and it didn't disappoint,” said Joshua Feinman, managing director and chief global economist for Deutsche Bank Asset Management in the Americas and a former Fed economist.
A yawner is fine, according to Chris Orndorff, senior portfolio manager at Western Asset Management Co., which runs $459.7 billion. “They were being very careful this time to choose their words carefully and retain their dovish posture, so the market wouldn't get confused.”
“We're getting a distillation of the message that they want to send to the market right now,” said Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income, which ran $356 billion as of Sept. 30. “The Fed is saying, what we want is a vastly improved picture. Until we get it, we are going to be full tilt, at $85 (billion) per month and keeping this interest rate extremely low until we get a much better economic picture. We're looking for much better.”
Meanwhile, Treasury 10-year yields fell Wednesdayfrom the highest level in nine months after a government report showed the U.S. economy unexpectedly contracted in the fourth quarter.
The benchmark yield touched the highest level since April early on Wednesday before Federal Reserve policymakers ended a two-day meeting. Gross domestic product was restrained by the biggest plunge in defense spending in four decades and dwindling inventories as household purchases picked up, the Commerce Department said.
The GDP report was “certainly a catalyst for some buying,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union, New York. “This does shatter the preconception of underlying momentum” in the economy.
The 10-year yield was little changed at 2% at 9:08 a.m. EST after touching 2.03%, the highest since April 25, according to Bloomberg Bond Trader data. The price of the 1.625% notes due in November 2022 was 96 20/32.
Bloomberg contributed to this story.