The broad indices all ended with gains after Federal Reserve Bank of Atlanta President Dennis Lockhart outlined his feelings about a curtailment of Federal Reserve bond purchases.
As part of the stimulus program known as "QE3," the central bank has been purchasing $85 billion per month in purchases of long-term bonds since last September.
The Fed's balance sheet expansion has been meant to hold long-term interest rates down. However, investors have anticipated the curbing of bond purchases by pushing the market yield on 10-year U.S. Treasury bonds up to 2.72% Tuesday afternoon from 1.70% at the end of April. The 10-year yield on Tuesday was up a considerable nine basis points from Monday, which likely reflected the Bank of Japan's upwardly revised outlook for economic growth.Meanwhile, the Fed has held the short-term federal funds rate to a range of zero to 0.25% since late 2008 causing many banks to continue to see their net interest margins declining during the second quarter, despite a widening of the yield curve as long-term rates increased. The Federal Open Market Committee has repeatedly said the federal funds rate will likely stay in the current range at least until the U.S. unemployment rate drops below 6.5%. The July unemployment rate was 7.4%, improving from 7.6% in June. Lockhart in a speech before the Kiwanis Club of Atlanta on Tuesday emphasized that the federal funds rate is the FOMC's main policy tool, and said the QE3 asset purchasing program "plays a complementary and supplementary role. It clearly was intended to have a beginning and end. It is not QE infinity." Lockhart also said decisions on reducing the Fed's balance sheet expansion "will be data dependent. Economic performance will dictate the path of policy." But Lockhart made two comments that likely provided some reassurance to investors looking to avoid being spooked by a sharp jump in interest rates. He said "healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms."
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