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Thus Spoke the Fed

The members of the Federal Open Market Committee (FOMC) remained confident in their outlook for growth of 2.8% - 3.2%. The harsh winter weather can account for most of the recent economic weakness; however, total new housing permits and new housing starts in the south, which should be less affected by the weather, have declined in each of the past few months.

Housing Permits

Source: Census Bureau.

Housing Starts - Southern US

Source: Census Bureau.

Tapering also has broad support and will likely continue at the current pace. Any change in the tapering faces a high bar, as the minutes confirmed that that tapering is on a glide path and assets purchases should conclude this year as long as the economy grows close to 3%.

Several committee members argued for a presumption in favor of continuing tapering at the pace of $10 billion at each FOMC meeting, unless there is a substantial deviation from the FOMC's economic forecast.

The Federal Reserve (the Fed) is undecided on how to improve the promise to keep rates low for longer. They believe the promise can be as or more effective than quantitative easing in providing monetary accommodation.

What We Think

Our outlook for 2014 is unchanged and we continue to expect equities to outperform fixed income; however, investors should expect more modest returns. We believe credit and liquidity risk to be rewarded, whereas interest rate risk will not be; and that with tapering a done deal, volatility should return to historic levels. We also expect interest rates, to remain ranged bound through to the next FOMC meeting on March 18-19, and that rates may be volatile as additional data becomes available.

Our 2014 forecast also remains unchanged and we think that U.S. gross domestic product will grow by 2.8%, inflation will slowly rise towards the Fed's 2% target, and the yield on the U.S. 10-year Treasury will increase to 3.25%.

For more weekly and quarterly economic commentary, visit principalfunds.com/commentary.

The opinions expressed are those of Principal Funds and may not come to pass.

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