VOL. 37 | NO. 24 | Friday, June 14, 2013
Bernanke clarifies Fed plan to cut bond purchases
WASHINGTON (AP) — A muddled message from the Federal Reserve has rattled investors for weeks.
So Chairman Ben Bernanke tried to set the record straight Wednesday about the Fed's plans to shrink its bond-buying program later this year and end it entirely in 2014 if the economy continues to improve.
Wall Street didn't like the content of Bernanke's message — investors dumped stocks and bonds in anticipation of rising interest rates — but analysts gave him a thumbs-up for clarity.
"They'd been a bit all over the place," says Paul Ashworth, chief U.S. economist at Capital Economics.
The Fed has been buying $85 billion worth of Treasury and mortgage bonds a month since late last year. The purchases pushed long-term rates to historic lows, fueled a record-breaking stock market rally, encouraged consumers and businesses to borrow and spend and provided a crutch to an economy hobbled by federal tax hikes and spending cuts.
The confusion began last month after the Fed released a summary of its April 30-May 1 meeting at which several Fed policymakers said they were open to reducing the bond purchases as early as this week's meeting. Bernanke, meanwhile, told Congress that the economy still needed help, but also that the Fed might decide to cut back the bond purchases within "the next few meetings" — earlier than many had assumed.
The conflicting messages left investors bewildered, and stock have gyrated ever since. Just a hint of a pullback in the bond purchases sent bond prices plunging and their yields soaring.
So on Wednesday Bernanke, a former Princeton University professor, took pains to make the Fed's intentions as clear as possible.
Going beyond the formal statement the Fed's Open Market Committee released after its two-day meeting, the chairman said at a news conference that it would "be appropriate to moderate the monthly pace of purchases later this year" and to end them in 2014 if the economy performed as well as the Fed expects it to. He said the bond-buying would probably end when the unemployment fell to "the vicinity of 7 percent" from May's 7.6 percent.
Bernanke explained that the rest of the Fed's policymaking committee had "deputized" him to expand on what fit "into a terse FOMC statement."
As he elaborated, markets tumbled: The Dow Jones industrials fell 206 points, or 1.4 percent, to 15,112. Investors dumped bonds, pushing the yield on the benchmark 10-year Treasury note up to 2.35 percent, its highest level since March 2012.
Since becoming chairman in 2006, Bernanke has labored to make the famously secretive central bank more open to the public. In 2011, he began holding regular news conferences to clarify Fed policy, something that would have been unthinkable under his predecessor, Alan Greenspan, who took pride in being as baffling as possible.
The Fed also released fresh economic projections Wednesday. Fed officials predicted that unemployment will fall a little faster this year, to 7.2 percent or 7.3 percent at the end of 2013. They think the rate will be between 6.5 percent and 6.8 percent by the end of 2014, better than its previous projection of 6.7 percent to 7 percent.
The Fed also said it would keep short-term rates at record lows at least until unemployment slides to 6.5 percent.
Bernanke said any reductions in bond buying, which keeps long-term rates low, would occur in "measured steps" and could be reversed if the economy proves weaker than the Fed expects. He likened any pullback in bond purchases to a driver letting up on a gas pedal rather than applying the brakes.
He stressed that even after the Fed ends its bond purchases, it will continue to maintain its vast investment portfolio — which has ballooned to $3.4 trillion —which will help keep long-term rates down.
The Fed faces a tough decision: If the central bank pulls back its stimulus too soon, the U.S. economic recovery could sputter. If it waits too long, super-low rates could ignite inflation. Or they could swell speculative asset bubbles as investors pursue riskier investments with potentially richer returns than low-yielding bonds.
The Fed knows the timing is tricky. It ended an earlier round of bond purchases in June 2011 only to see economic growth remain weak and unemployment stay at levels more consistent with a recession than a healthy recovery.
And if the Fed puts out a confusing message, investors could panic, dump bonds and drive rates high enough to jeopardize economic growth.
"We are determined to be as clear as we can," Bernanke said at Wednesday's press conference, "and we hope that you and your listeners and the markets will all be able to follow what we're saying."
But on one subject Bernanke chose discretion over candor: He declined to address speculation that he will step down as Fed chairman when his term ends in January.
He was asked to respond to comments Monday by President Barack Obama, who said Bernanke had already stayed longer than planned. The president's remarks added to expectations that Bernanke intends to step down. Bernanke demurred.
"I would like to keep the discussion on monetary policy," he said. "I don't have anything for you on my personal plans."