The employment report released on July 5th showing 195,000 new jobs and the unemployment rate remaining at 7.6% increase the likelihood that the Fed will begin to slow bond purchases late this year, end bond purchases in mid-2014 and begin to raise the Fed Funds rate in 2015. As explained on the Atlanta Federal Reserve’s blog the report is consistent with the Fed’s own projections. Assuming job growth continues at about the pace seen in the last few months and that the labor force participation rate holds steady, unemployment would move to 7.26% in December 2013, 6.92% in mid-2014 and 6.25% in Mid 2015.
If this is correct, and if the Fed sticks to its current guidance about the Fed funds rate, the Fed Funds rate will remain in the current 0 to 25 bp range until sometime in the first half of 2015 as the yield curve steepens slightly until then. The probable slowing of bond purchases most likely means further increases in bond yilelds over the next couple of years. The implications for stocks and gold depend on the economy and inflation as well as the Fed. If the economy does as well as the Fed expects, stocks should avoid a major set back. Under the Fed’s outlook, with continued low inflation, gold won’t have much reason to reverse its recent decline.