Summary of Today’s Update:

  1. The major market indices gave up ground last week with Fed “taper” talk resurfacing once again.  Interest rates and bond prices held steady while commodity prices were volatile but end the week relatively flat.
  2. Federal Reserve Open Market Committee meets this week (Tuesday and Wednesday), and could shed some light moving forward on the future of “QE3” and when the possible “taper” of the current bond buys might occur.  Does it really matter to the markets?  Some feel the “taper” is already priced-in to the markets.

Read on for more details………..

 The Markets:

The major stock indices lost ground last week on new talk of the Fed possible beginning to “taper” back on the $85 billion per month in bond buying known as “QE3” as early as this month.  A new round of semi-positive economic news helped accentuate the speculation.  Interest rates did remain fairly stable along with bond prices in general, and overall commodity prices were volatile but were higher on Friday as well as today.  The 30 year fixed rate mortgage stood at 4.48% on Friday, with the rate for a 15 year fixed mortgage ending the week at 3.49%.  (

Taper Two-Step – Part II

The policy-making arm of the Federal Reserve – the Federal Open Market Committee (FOMC) – meets eight times each year. All FOMC meetings are important, but when there is an expectation that policy could be adjusted, they get more attention. That happens to be the case with the upcoming December 17 – 18 meeting.  There is talk the FOMC may begin its long-awaited reduction, or tapering, of the $85 billion in longer-term bond buys it makes each month.

As mentioned in past summaries, bond prices and yields are inversely related. The Fed’s goal has been to push up bond prices and keep a lid on yields, hoping that lower rates spur consumer and business spending, which in turn, would increase economic activity and hiring.  Only then would the Fed cease its bond buys and eventually consider raising the fed funds rate. Even then, Fed officials have insisted they are in no hurry to boost the key short-term lending rate that historically has affected T-bills, money markets, and CDs.


Following the end of the government shutdown, most analysts expected the Fed would wait until at least March before seriously considering a small reduction in bond purchases.  Economic data recently has been stronger than expected, and taper talk has increased.

With the U.S. labor market showing signs of strengthening, a Dec. 6 Bloomberg News survey  revealed 34% of economists believe the FOMC may start dialing down the $85 billion in monthly bond buys at the Dec. 17-18 meeting rather than waiting until January or March. That’s double from a month ago.

Reasons to taper in December include—

  1. March – July nonfarm payroll growth averaged 156,000/month, while the August – November period averaged 204,000 per month (BLS data). It’s nothing spectacular, but it’s an improvement.
  1. The unemployment rate has fallen to 7.0%, and it’s sneaking up on the 6.5% threshold (not a trigger) for raising the fed funds rate.
  1. The market appears to have accepted that a taper isn’t a tightening, i.e., the eventual end to the bond buys isn’t expected to bring about a quick hike in the fed funds rate.
  1. Possible distortions in credit markets (bubbles) that may be brought on by Fed bond buys.
  1. The Fed wants to gravitate toward an emphasis on forward guidance, or the insistence that the fed funds rate will remain near zero for quite a while as a way to help anchor long-term rates and boost the economy.
  1. The very modest (many would say underwhelming) 2-year budget deal reached by Congressional negotiators last week passed the House. Though there may be some wrangling in the Senate, it will probably pass, taking a Jan 15th government shutdown off the table.

Reasons not to taper in December—

  1. The Fed may want more concrete evidence on the labor market and the general firming we’ve recently seen in the economy.
  1. Inflation remains uncomfortably low for the Fed.
  1. The December Fed’s Beige Book, which reviews the anecdotal economic evidence, reflected the same “modest to moderate” pace seen in October.
  1. Though we’ve seen a recent pick up, consumer spending has been sluggish for much of the year.
  1. Janet Yellen is about to assume the helm of the Fed. She is considered to be more favorably disposed to bond buys, and she may not yet be comfortable adjusting course.

Just because the list is slightly heavier on the “pro-taper side” doesn’t mean we’ll get a reduction in purchases at the upcoming meeting. Any items on the “do not taper list” could keep the Fed from acting.

Finally, at this juncture, does it really matter whether the FOMC announces a modest taper this week or at a near-term meeting? Some would argue no, as it’s probably priced into market.  How the Fed clarifies and positions expectations regarding monetary policy may be more important.  We will keep you informed.

We hope you are all getting ready for a great finish to 2013 and the Holiday Season ahead.  We look forward to working with you in the years ahead.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

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