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By Jeremy Glaser and Robert Johnson, CFA | 06-19-2013 04:30 PM

Johnson: Don't Fret the Fed

The Fed has played a key role in nudging the recovery along, but the taper of bond purchases won't torpedo the economy, says Morningstar's Bob Johnson.

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. After a tumultuous May in the bond market, many investors were closely watching the Fed statement this week. I'm here with Bob Johnson, the director of economic of analysis at Morningstar, to see what the Fed said and what its implications could be for the bond market.

Bob thanks for joining me today.

Bob Johnson: Great to be here.

Glaser: So what exactly did the Fed announce this week? Was there anything out of the ordinary in your mind?

Johnson: You know in the paper statement, nothing really changed from the past releases, and I think that that was pretty much status quo that they will remain supportive of the economy, that they are very closely watching mainly two things: the inflation rate in conjunction with the unemployment rate. And really the tightening wouldn’t begin in earnest until unemployment began to come down, and they reaffirmed that statement.

Now the real point that people might have had point to disagree with probably came out of the press conference, where Fed chairman Ben Bernanke talked about how they might get out of some of their mortgage-backed securities and how that program may end. And when he talked about that program, he said there was kind of decoupling if you will between the mortgage buying and the federal-funds rate. With the Fed-funds rate there was pretty much unanimous agreement that that rate, which is about 0.25% right now, 0-0.25%, will not go up until 2015, and they reaffirmed that in every possible way. I think 13 of the governors were all on board that that was going to happen in 2015. So that was certainly one thing that came across loud and clear.

But on the other hand they did also talk about that they would begin perhaps tapering the purchases of bonds, the mortgage-backed securities in particular, which they have been buying $40 billion-$45 billion worth every month for the last several months. And [they said] that program might slow, and if they stayed on the Fed's relatively optimistic economic forecast, the bond buying might be completely over by the middle of 2014. That would imply that probably the unemployment rate would be about 7%.

Now some people thought that if we had to get all the way down to 6.5% before anything happened with any monetary policy, but that clearly was not what they said. But that’s I think what hit the people real hard in the market Wednesday is that they are talking seriously about tapering and they are talking about even an end of all purchases within less than a year.

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