We have to look at the minutes and the question-answer portion of his presentation that he gave a couple of hours later in Boston as part of the NBER summer institute separately, says Brian Jacobsen, Chief Portfolio Strategist at Wells Fargo Fund Management.
When it comes to the minutes, there are two important things to look into. First, they were looking at the mortgage markets to find out the effect of higher interest rates on the housing market. The FOMC members seem to have dismissed the effect of higher mortgage rates on housing since housing application numbers didn’t fall significantly. But data released after the June 19 meeting showed mortgage applications actually plummeted as a result of higher interest rates. So, they probably have to do a rethink on the effect these higher rates are going to have on the housing market, he noted.
The second aspect that was in the minutes was actually what was not in the minutes; the 7 percent limit that the chairman had set at the press-conference afterwards saying that they are hoping to wrap up the assets purchase program by the time the unemployment rate hits 7 percent, which wasn’t in the minutes. So it is not a firm commitment by the Fed to actually wrap things up when the economy gets to that sort of unemployment rate, Brian said.
Asked if the Fed might begin wrapping up QE by December, Brian answered in affirmative. The reason why they might begin tapering in December and not September was pointed out by the chairman during the Q&A portion of his presentation in Cambridge. When the Federal Reserve looks at the unemployment rate, they think the unemployment rate actually overstates the health of the labor market, because Bernanke talked about things like low participation rate and the long-term unemployed.
So, when it comes to forecasts, December is the earliest when the Fed is likely to begin tapering. And they probably want to do it then because in 2014, the voting members of the FOMC changes rather dramatically, they become much more hawkish. As a result, it will be very difficult for them to sustain an assets purchase program in calendar year 2014, he observed.
Asked to comment on the movement of S&P this year, Brian said at this point its sort of “game-on” for the S&P 500 and emerging market stocks. The emerging market stocks were hit because of the taper-talk, because of the fear of capital flowing out of these economies.
For the short-term; i.e. for the fiscal quarter or so, however, we could see a decent move up in some of the emerging market equities. But for the S&P, there could be a revisit of the previous high of 1687, perhaps going up to 1720. However, economic data could be rather weak in the fourth quarter and as a result, there could be a bit of payback at that point and the S&P could wrap up the year at current levels; i.e. 1640, he concluded.
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