The Open Market Committee of the Federal Reserve won’t meet for four weeks, but officials of the central bank fanned out last week, answering plenty of questions about the future of financial stimulus. Investors apparently liked what they heard. Stocks pushed past major milestones to new all-time highs.
While each of the Fed governors speaks for himself, the message appeared to be the same. While the end to the bank’s purchases of long-term debt will start sooner, rather than later, any tapering won’t be fast. And short term interest rates are likely to stay near historic lows for a long, long time.
This outlook is already pretty much factored into interest rates already. Long-term rates fell to historic lows thanks to the Fed action to buy $85 billion in Treasury debt and mortgage backed securities. Now yields on the 10-year Treasury are more than 1% higher than May lows, and are likely to go higher. But the Fed signaled it was ready to make sure the move higher in interest rates wouldn’t jeopardize the economy’s fledgling rebound.
Of course, it’s one thing for a central bank to say it can do something, and another to actually accomplish it. But so far, the market is buying what the Fed is selling. The dollar firmed, moving the trade-weighted index back towards the 81.72 level that’s fair value according to current fundamentals. Gold plunged, with inflation under check despite all the worry about the government’s deficits. The latest reading of the Consumer Price Index showed prices rising only 1.7% year-to-year, when volatile energy and food components are taken out. That’s below the Fed’s 2% target, another reason for the bank’s continued aggressive stance on monetary policy. The CRB index also remains in check, trading nearly 17-months, thanks also to subdued energy prices.
Investors are starting to buy into forecasts for rising GDP in 2014 as well. Nobody’s forecasting a boom, but a better pattern that could keep corporate earnings on track. Third quarter earnings beat estimates by a healthy margin over misses. As a result, fundamentals now target the 1,825 to 1,827 level on the S&P 500 Index, with the VIX factor of market fear trading near its lowest level of the year.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and farm management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key farm crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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