The Fed will reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of 41 economists on Dec. 19. Policy makers next meet Jan. 28-29.
“They are going to do the first couple of tapers and then see what happens,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The data dependency will come probably starting at the April meeting. That’s when they will have enough time to gauge reaction to tapering.” The odds of an increase in the central bank’s benchmark interest-rate target by January 2015 were about 22 percent today, based on data compiled by Bloomberg from futures contracts. The chances were 11 percent on Nov. 25.
Fed officials said in their statement last week it “likely will be appropriate to maintain the current target range for the federal funds rate well past” their 6.5 percent jobless-rate threshold, especially if inflation stays below the Fed’s 2 percent target. The benchmark rate has been a range of zero to 0.25 percent since 2008.
Inflation as measured by the personal consumption expenditures price index rose 0.9 percent for the 12 months ended in November, and the jobless rate last month was 7 percent, a five-year low.
“They’ll try to keep rates anchored as much as they can, but it will be difficult if data continues to come in strong,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The risk is if the economy speeds up faster than people expect, the Fed won’t want to, and won’t be able to, keep rates where they are.”
Rates on Treasury one-month bills fell below zero amid rising demand for short-term debt at year-end. The rates dropped to negative 0.0051 percent, from 0.0051 percent Dec. 24.
Treasury 10-year notes pay 1.76 percent after subtracting consumer price increases as a stronger economy pushes yields higher. The gauge of real yields has averaged 1.09 percent since December 2008.
Today’s jobless-claims data followed reports on Dec. 24 that showed U.S. durable-goods orders rose in November more than forecast, and new-home sales exceeded projections.
The rise in Treasury yields has driven mortgage rates higher. Thirty-year fixed mortgage rates rose to 4.51 percent Dec. 24, compared with the 2013 average of 4.04 percent, according to Bankrate.com. It touched a low for the year of 3.4 percent in May.
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