As expected, the Fed announced further tapering, reducing bond purchases to $55 billion per month. Also as expected, the Fed removed its reference to the 6.5% threshold as an indicator of when it would consider raising the federal funds rate. How did financial markets react? Yields on short- and long-term bonds rose quite a bit. Why? One reason is hidden in its economic forecast. If one compares the March 2014 forecast with the December 2013 forecast, the median forecast for the federal funds rate rose from 0.75% to 1% for the end of 2015 while the median forecast for the end of 2016 rose from 1.75% to 2.25%. In other words, members of the FOMC now anticipate raising the federal funds rate a little earlier in 2015 and expect rates to rise more quickly than previously thought.
For further information about the Fed's latest economic forecast, see my economic forecast web page.
