The 6.5% unemployment target has been dropped by the Fed, confirming what market participants had expected, the Federal Open Market Committee announcement Wednesday afternoon confirmed.
"The Fed never took 6.5% seriously," said a trader on the West Coast. "They know that the rate doesn't have anything to do with employment. Unless the rate changes entirely it won't affect the market."
The committee also said tapering will continue, with another $10 billion cut this month. Separately, in its summary of economic projections, the Fed reiterated the first rate hike is expected in 2015.
"[The Fed] had no idea that the unemployment rate would fall as fast as it has with so little movement towards the inflation target of 2%," Loop Capital Markets said in a report released Monday.
Traders Wednesday morning predicted that the Fed would adjust or completely eliminate the benchmark.
"What the Fed is going to do is take out the 6.5% explicit target," a senior trader from California said in an interview before the announcement.
After falling to 6.6% in January, the employment rate ticked up to 6.7% in February, with adverse weather conditions blamed for the increase, suggesting the percentage may in fact be lower.
"Now that we're there, there is no freaking way they can do what they said they were going to do without injecting more volatility into the market," the trader said.
While the economy has been recovering, many industry experts do not believe it is stable enough for the Fed to raise interest rates at this time. Strategists have predicted that the Fed will start raising interest rates in mid- to late-2015. In a speech last month, Yellen said while the Fed is likely to continue tapering its bond-buying back program, it has no immediate plans to raise interest rates.
"I think they're going to probably change some of the metrics on what they are basing their future rate moves," a trader in New York said. "They've been pegging it on a plummet in job growth, and people have been very focused on those numbers."
Some industry participants have expressed concern about the Fed increasing interest rates sooner than expected because the Federal Open Market Committee has decreased the amount of bonds it purchased to $75 billion in January and $65 billion in February.
"The market seems to be taking tapering in stride," said a trader based in Chicago. "Rising interest rates would be a different situation."
With only two deals greater than $100 million expected in the negotiated market, primary market trading began slowly Wednesday.
"The market is pausing from last week's heavy issuance. Munis had a good performance leading to that, but the market is at a wall right now," said a trader based in the West Coast.
The largest deal in the negotiated market comes from the city of Holland, Ottawa and Allegan Counties, Mich., for $160 million of electric utilities system revenue bonds. Jefferies LLC is the lead underwriter. The bonds are rated Aa3 by Moody's and AA by Standard and Poor's.
"The city of Holland is an attractive issuance, because it is new credit," said a trader based in Pennsylvania.
Westchester County Local Development Corporation will issue a twofold deal totaling $110 million of Pace University revenue bonds. Series 2014A of the deal consists of $80 million of revenue bonds, while series 2014B is comprised of $30 million. The bonds are rated BB-plus by S&P.
There are no deals scheduled for over $100 million in the competitive market Wednesday.
"Volume is down 30% to 40%. Overall, munis are very healthy; there has been a good turnaround from six months ago. The market is just relying on new issuance," said a West Coast trader.
Yields were steady to softer Wednesday morning, according to Municipal Market Data, with bonds maturing from 2017 to 2020 climbing as much as two basis points, while bonds maturing from 2021-2024 jumped as much as one basis point. Bonds maturing on the long end of the curve were steady.
Treasuries were slightly weaker Wednesday, with the 30-year yield climbing two basis points to 3.64% and the 10-year benchmark inching up one basis point to 2.70%. Two-year note was unchanged at 0.36%.
