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Analysis: FOMC meeting, UK Budget

20 March 2014


Fed changes guidance, UK annuity market takes stock

Read more: Schroders FOMC The Fed

Janet Yellen’s first Federal Open Market Committee (FOMC) meeting as chair of the Federal Reserve was marked by a change of communication that caused some market confusion, according to Schroders' European economist Azad Zangana.

"The Fed held interest rates and continued to taper its quantitative easing (QE) programme at the same rate. However, as the US unemployment rate quickly approaches the Fed’s 6.5% target, the FOMC has taken a leaf out of the Bank of England’s book by scrapping this form of forward guidance and instead will look at a broad range of indicators and provide softer 'qualitative’ assessment on the economy."

The FOMC is now saying that it 'likely will be appropriate to maintain the current target range for the Federal funds rate for a considerable time after QE ends’ and that it 'currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may for some time warrant keeping the target federal funds rate below levels the committee views as normal in the longer run’.

The confusion has arisen from the FOMC members’ projected path for the Fed’s funds rate, added Zangana. "The median member’s forecast for rates at the end of 2015 is 1%, which is more aggressive than investors had anticipated.

However, Janet Yellen’s subsequently helped to allay fears by communicating her intention to keep monetary policy accommodative while inflation is below the Fed’s long term objective and while unemployment remains high."

Meanwhile, Marcus Brookes, Schroders fund manager multi-manager explained that shares of annuity providers have come under pressure due to the UK Budget rule change that means people will no longer be required to purchase annuities.

But UK equities fund manager and analyst Jessica Ground says the change does not mean the end of the annuities market. "The government clearly will not want a situation where people do not buy annuities and then run out of income during their retirement. The immediate reaction may seem as though it is Armageddon for the annuities market, but it is likely to take some time to work out the details."

Gilt issuance for the coming fiscal year was revised down sharply, causing 10 year gilts to rally a few basis points, although this was as much for technical reasons as the result of lower borrowing due to the improved cyclical outlook according to James Bilson, fixed income analyst .

"The long end of the gilt curve suffered as a result of the announcement about annuities, which is likely to reduce demand for long-dated assets from pension and insurance funds," he added.


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