Federal Reserve Chairman Ben Bernanke used his quarterly press conference Wednesday afternoon to try to convince the markets that the central bank is serious about pulling back from its bond-buying program if the economy continues to improve.
Bernanke’s hour-long question-and-answer session appeared to work. U.S. Treasuries yields, a key indicator, hit a 14-month high after his comments, with the 10-year Treasury note shooting up to 2.33 percent from 2.21 percent. The Dow Jones Industrial Average fell 206 for the day as investors anticipated higher interest rates.
While trying to dispel some of the confusion that had spread about the Fed’s monthly large-scale bond purchases, Bernanke revealed key new details about the central bank’s plans for monetary policy. That’s new for the post-statement press conferences, which are themselves a relatively new practice for the Fed. In particular, Bernanke said the Fed will begin to “taper” asset purchases — reducing the monthly amount — once the unemployment rate nears 7 percent.
Bernanke insisted that he was not announcing new policy in his press conference, but that he had been “deputized” by the other members of the rate-setting Federal Open Market Committee to explain the details of existing plans.
Here is the current version of the Fed’s plans, as sketched out by Bernanke in the press conference: The Fed will continue buying $85 billion of assets each month until conditions improve, with the idea of reducing the amount to zero once the unemployment rate falls to 7 percent.
After the bond purchases cease, the Fed will wait until unemployment is below 6.5 percent before it begins raising interest rates — gradually — from their current near-zero levels.
What that means in practice, Bernanke suggested, is that the Fed will begin slowing purchases later this year and end them sometime next year. Then rates will start rising starting in 2015.
The key thresholds, then, are 7 percent for the end of quantitative easing, and 6.5 percent for short-term interest rates to begin to rise.
Bernanke spelled out the details in an apparent effort to contradict the markets’ current expectations. Before Wednesday’s policy announcement, a number of signs indicated that investors expected the Fed’s stimulus to fade before economic growth picked up and unemployment dropped. Short-term interest rates were up and inflation expectations were down.
Whether those trends will reverse remains to be seen. But Bernanke tried to send the message that the economy was improving, and that the Fed would not stop trying to boost it until its goals were reached.
The private-sector economy is in relatively good shape, by the Fed’s estimation. Bernanke suggested that the “fundamentals look better to us,” including the housing market, but that Congress and the White House were impeding the recovery with tax hikes and spending cuts, “a very heavy headwind.” The members of the Fed expect unemployment to fall to between 7.2 and 7.3 percent this year, and to roughly 6 percent by 2015.
On the question of inflation, though, Bernanke was not as clear. When the Economist’s Ryan Avent suggested to Bernanke that “inflation suggests you should be pushing harder on the accelerator,” Bernanke responded, “I don’t disagree with anything you just said.” Although Bernanke acknowledged that “inflation that’s too low is a problem,” he gave a somewhat hand-waving explanation for why the Fed was not doing more to boost inflation in the short term, attributing the current low inflation indicators to temporary factors that he expects to self-correct.
Despite questions about whether the Fed will allow inflation to rise significantly, Bernanke got his point across: the Fed sees an improving economy, but nevertheless has its foot on the gas.