U.S. markets finished up for the week following the Federal Reserve’s September Federal Open Market Committee meeting.
In its September FOMC meeting, which concluded on Wednesday, the Federal Reserve reported it would reduce asset purchases as expected with the end of QE3 still slated for October. The FOMC will reduce asset purchases by $10 billion bringing total monthly purchases of mortgage-backed securities to $5 billion and long-term Treasuries to $10 billion.
The FOMC also stated it would keep the federal funds rate unchanged at 0% - 0.25%, another key change also watched by investors. The Federal Reserve also did not change its outlook on future rate increases keeping its focus on a “considerable time” before it would make changes. The rate increase is still expected for June 2015 with the majority of FOMC participants seeing the rate somewhere in the range of 0.25% - 2% by the end of 2015.
Given the Federal Reserve’s goals, its QE3 program appears to be successful. The asset purchase program has maintained downward pressure on longer-term interest rates. Its most significant effects have been seen in mortgage rates. The weekly average for the 30-year fixed-rate mortgage was at 4.12% before the Federal Reserve’s policy meeting, according to Freddie Mac’s Primary Mortgage Market Survey.
Broader financial conditions also appear to be improving. The U.S. unemployment rate is at 6.1% falling from its peak of 10% in 2009. The inflation rate was at 1.6% in June and July. The U.S. Bureau of Economic Analysis' most recent report also showed improvements in GDP with the seasonally adjusted annual rate at 4.2% for the second quarter.
In addition to the Federal Reserve’s announcement on quantitative easing and the federal funds rate it also included a disclosure in its September 2014 meeting discussing its plans for reducing or normalizing its balance sheet. In the Federal Reserve’s August quarterly report on its balance sheet, it stated total assets of $4.4 trillion. Details on future plans, specifically reinvestment of securities, for its balance sheet were provided by the FOMC in its Policy Normalization Principles and Plans.
Reported projections for the broader economy were also stated by the FOMC in September. Projections showed the unemployment rate falling to 5.4% - 5.6% in 2015. The inflation rate is expected to remain basically unchanged at 1.6% - 1.9%. GDP expectations were slightly lowered for 2015 falling from 3.0% - 3.2% to 2.6% - 3.0%. All of these indicators show gradual progression continuing in U.S. economic conditions.
U.S. financial markets reacted positively to the decrease in asset purchases and positive outlook for the U.S. economy. The Dow Jones Industrial Average was up 0.15% on Wednesday and the S&P 500 gained 0.13%. The positive momentum continued through the end of the week with the DJIA finishing up 1.74% and the S&P 500 up 1.25%. In the DJIA, Goldman Sachs (GS, Financial) led the week’s increase up 1.9%. Meanwhile, in the S&P 500 the Healthcare sector showed the greatest gain up 1.68%.
