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POLITICS: PennAve

Ben Bernanke finally gets through to markets

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PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke,Quantitative Easing,Financial Markets,Taper

It's been a tough year for outgoing Federal Reserve Chairman Ben Bernanke, who at times, by his own admission, has struggled to communicate the Fed's plans for its stimulus programs to investors.

But with Wednesday's announcement that the central bank would taper its $85 billion-a-month bond buying program by $10 billion, Bernanke seems to have finally gotten the message across: The Fed will continue trying to ease monetary conditions, even while transitioning away from quantitative easing. And it will do so by strengthening its commitment to keep interest rates near zero.

"This is not intended to be a tightening," Bernanke said at a press conference following the announcement, insisting that the central bank could "achieve essentially the same amount of accommodation" by strengthening its commitment to zero interest rates. The Fed's statement said that it would keep rates at zero until "well past" the time unemployment falls below 6.5 percent (it's currently at 7 percent) and as long as inflation remains below the Fed's 2 percent goal.

Bernanke has insisted all along that tapering is not tightening, but Wednesday was the first day markets appeared to believe that message. Stock markets soared to near-record highs following Wednesday's taper announcement, with the Dow Jones Industrial Average gaining 1.8 percent to 16,168 and the S&P 500 1.7 percent to 1,811.

Market expectations of the first interest rate hike, as reflected in the market for Eurodollar futures, hardly budged after the Fed announcement, pricing in small odds of the interest rate rising above zero before mid-2015, and higher odds in later months. Those implied yields are in line with the Fed's guidance and Fed officials' projections released Wednesday.

It remains to be seen whether the Fed's plans will translate to faster economic growth and quickly lowering unemployment. But on Wednesday it was clear that Bernanke had begun the process of winding down the quantitative easing program with relatively little disruption to financial markets.

The next step Bernanke outlined in his press conference would be a "deliberate and data-dependent" approach to further reducing the bond purchases from $75 billion a month to zero. Bernanke said the Fed could "skip a meeting or two” or “go a little bit faster” in slowing the purchases, depending on the economic data, reducing the mix of Treasury bond and mortgage-backed securities by equal amounts each time.

With the Fed's balance sheet just shy of $4 trillion as of the latest data release, that means quantitative easing will likely be wound down to zero sometime by the end of 2014, with somewhere around $500 billion in stimulus added.

Bernanke won't be around to see the end of that months-long process. He steps down at the end of January, and will likely be replaced by current Vice Chairwoman Janet Yellen, who is expected to be confirmed by the Senate this week.

But Bernanke thinks he already knows how the rest of the tapering process will go. He said that as the taper continues, “we're hopeful that the economy will continue to make progress and that we’ll begin to see the whites of the eyes of the end of the recovery.”

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Author:

Joseph Lawler

Economics Writer
The Washington Examiner