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Jun 25, 201403:01 PMOpen Mic

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Market and economic update: The Fed announces its next round of tapering

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The attention of investors last week was focused on Federal Reserve policy and the evolving conflict in Iraq and Ukraine.

  • The Federal Open Market Committee (FOMC) meeting concluded with an announcement of another $10 billion in tapering of bond purchases. Given the comments made by Janet Yellen at the press conference, the market seemed to believe she was leaning toward a dovish monetary policy. In our view, the Fed will likely complete tapering in October and may increase the Fed Funds rate in the second quarter of 2015.
  • The conflict in Iraq continued with Sunni Muslim forces and Islamic State of Iraq and Syria (ISIS) controlling Mosul and key border crossings with Syria and Jordan. Shiite Muslim militias seem to be mobilizing to defend key mosques and the southern region of Iraq in support of government troops. Kurdish militias have secured Kirkuk and seem to be consolidating authority over the Kurdish region of Iraq. This is likely to be a longer conflict as long as oil infrastructure in the south remains in operation. We believe the likelihood of involvement of U.S. forces or air strikes is small.
  • The Russia-Ukraine conflict continues at a simmer, with Russian troops massed on the Ukrainian border and further conflict with pro-Russian forces in Ukraine. As long as Western forces do not get directly involved, the likely outcome is for a government in Ukraine that is friendly to Russia.

In the United States, data on inflation and industrial production seemed to indicate that U.S. economic growth is improving. Industrial production for May rose 0.6%, with year-over-year growth reaching its highest level since 2012. Consumer prices in the United States rose 0.4% for May, a gain of 2.1% over the past year, sparking market concerns that the Fed may be forced to increase interest rates in the near term.

(Continued)

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