Copying and distributing are prohibited without permission of the publisher
Analysis: FOMC meeting, UK Budget
20 March 2014
Fed changes guidance, UK annuity market takes stock
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
"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