The FOMC statement and Ben Bernanke’s press conference was not well received this afternoon. Hopes for something that would smooth over the recent volatility with assurances that QE3 would last for many more months to come were dashed by comments during the press conference that most FOMC members could see bond buying tapering off this fall and ending by sometime in 2014. Despite those remarks, the Fed expects rates to remain low into 2015.
Behind all this is a factor bigger than even the Fed — the economy. If the economy continues to strengthen interest rates will rise and if the economy reverses and turns down, rates will drop. Given the Fed’s 2015 forecast of 2.9% to 3.6% GDP growth, inflation of 1.7% to 2% on Core PCE and unemployment of 5.8 to 6.2%, interest rates will be slightly higher in 2015 but not out of sight. Look for the ten year treasury to be 3.5% to 4.5% in 2015. The rest of the Fed’s economic projections slightly lowered the outlook for the rest of 2013 and made 2014 look a bit better.
In the short run traders can’t fight the Fed, but in the long run the Fed can’t fight the economy.