Daily Bullets……For May 8, 2014

·         Fed bond holdings to remain high for extended period……In further Congressional testimony today, Fed chief Janet Yellen stated that its bond holdings (held under its QE program) would remain elevated for up to 8 years even after the Fed begins to raise interest rates.

What’s the point? The Fed is not only being very open and transparent about its strategy, but also is stressing heavily that it expects to maintain a very high degree of monetary accommodation for a very extended period. For the most part, this is positive for financial assets, but there are drawbacks: 1) monetary theory states that high money supply growth via easy Fed policy can stoke inflation; and 2) the Fed’s policy may reflect deeper concerns about the underlying strength of the economy. Both factors enter into the “balancing act” the Fed has been playing now for over five years to seek and deliver an appropriate level of policy accommodation. With respect to the highly unusual policy, we are in uncharted waters, which does create an element of risk. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140508&id=17601855

 

·         Unemployment apps fall………Unemployment applications dropped this week and the 4-week moving average is now about 7% below all of last year.

What’s the point? This is another in a continuing series of data which shows the U.S. economy is improving. One continuing problem has been the very slow pace of this economic recovery, now in its fifth year. We expect some acceleration in the rate of economic growth in 2H-14 but we note economists’ forecasts are all over the lot, some as low as 2% with some as high as 4%. It is still difficult to get a solid read into the potential for the economic growth rate or to feel confident about a projection. We think faster employment growth is one of the most important factors supporting our expectation for higher economic growth in 2H-14, which we expect could improve to the range of 2.5%-3.0%. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140508&id=17600346