Key Changes in FOMC Statement; Market Reaction
- What had just been "labor market indicators" has been contracted to "some indicators of labor market conditions." Subtle, but bearish.
- Mortgage rates have risen "further" now as opposed to "somewhat." Fed continues to be conscious of mortgage market in the statement itself.
- Previously, Fed said "downside risks" had diminished. This time, they added "but tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."
- Fed throws down gauntlet to Congress/President in adding a new section to the announcement saying: "taking into account the extent of federal fiscal retrenchment," things have been going pretty well, but not well enough to taper yet. The Fed decided to "await more evidence progress will be sustained before adjusting asset purchases."
- Instead of saying their "prepared to increase or reduce the pace of purchases,' they've change this to say "In judging when to moderate the pace," they'll assess whether the econ data supports the expectation of improvement. This is key. They're not only looking to hold steady, but to support improving expectations. This is different than some takeaways from previous Fed communications where Bernanke (in press conferences) has indicated that gains have been made and the Fed was just waiting to make sure they were sustainable.
- The Fed has now added a specific assertion: "Asset purchases are not on a preset course." They added that committee decisions will remain contingent on the data, but also has to keep an eye on efficacy and costs (which implicitly include risks of market disruption).
All told, this is incredibly bullish inasmuch as it's a refreshing revelation that the Fed isn't turning a blind eye to the economic fallout from higher rates. The Fed got a trial balloon up for the impact of tapering. They saw that it was too much, too soon (lessons from 1994 and 1998) and are CLEARLY acting to moderate the pace of the longer term sell-off that will ultimately continue if economic data stays on track of tepid improvement.
MBS and Treasuries are about a point better in price. 10's are down to 2.72 and Fannie 4.0s are up to 103-27. Numerous positive reprices.