Ben Bernanke’s colleagues all say the same thing: the Federal Reserve chairman was misinterpreted last week.
Global markets were spooked after Bernanke revealed new details about the schedule for winding down the Fed’s bond-buying stimulus program and future interest rate hikes. Although the exact effects of Bernanke’s statements cannot be disentangled from other developments, such as the jitters in Chinese markets, sliding stock markets and rising government bond yields suggest that overall his comments were viewed as tightening monetary conditions.
On Thursday, other members of the Federal Reserve did their best to reverse that perception and reassure investors that Bernanke will not take away the punchbowl before the party’s over.
Dennis Lockhart, the president of the Federal Reserve Bank of Atlanta, told an audience in Georgia that “it seems to me the chairman said we’ll use the patch (and use it flexibly), and some in the markets reacted as if he said “cold turkey.” Lockhart emphasized that Bernanke’s schedule for slowing the pace of monetary stimulus – Bernanke has said that the Fed would taper its $85 billion a month in bond purchases starting in the fall – was conditioned on the economic recovery unfolding as hoped.
Bernanke reiterated several times at his press conference that the plans for reducing the size of monthly asset purchases depended on economic indicators, but Lockhart was not the only one who felt the need to underscore that point for the Fed chairman. Jerome Powell, the newest member of the Fed’s Board of Governors, said at a Bipartisan Policy Center Event Thursday that “I want to emphasize the importance of data over date…. The path of purchases is in no way predetermined; we will monitor economic data and adjust our purchases as appropriate.”
William Dudley joined the chorus from New York City, where he is the president of the regional bank and, along with Powell, a voting member of the Fed’s monetary policy committee. Dudley issued a fairly straightforward correction to bond markets, saying that if investors thought that the Fed was prepared to stop buying Treasuries and let yields rise, “such an expectation would be quite out of sync” with the members of the Fed themselves.
The market reaction to the group effort to clarify the Fed’s intentions seemed to have some initial success. World stock markets rose throughout the day, and yields on Treasury 10-year bonds fell to just below 2.5 percent after hitting nearly two-year highs in the days before.
Thursday’s speeches by Powell, Dudley and Lockhart bring the total number of members of the Fed pushing back against the widespread interpretation that the Fed was withdrawing stimulus to five. Narayana Kocherlakota, the president of the Minneapolis Fed, issued a press release on Monday calling for communicating an easier policy and stating there was “no contradiction” between his outlook and Bernanke’s. St. Louis’s James Bullard put out a statement of his own suggesting that it was a mistake that Bernanke’s press conference created the impression that he was planning on slowing asset purchases without the economy improving.
The concentrated effort of Bernanke’s colleagues may not be enough to turn around the public’s perception of what their plans for the money supply are. One factor in the ongoing confusion about the Fed’s stance is that investors may understand Bernanke and company’s stated plans perfectly well, and yet not trust them to carry them out.
There could be any number of reasons for the market to not believe the Fed will follow through on its promises, but the Fed’s tolerance inflation below its goals might be the biggest.
The crux of the Fed’s stimulus program is that it has said it will continue quantitative easing of $85 billion in Treasury bond and mortgage-backed securities purchase every month until gradually reducing them to zero when unemployment dips below 7 percent. Then it will keep interest rates near zero until unemployment falls below 6.5 percent before slowly raising them.
The Fed has reiterated in its announcements and press conferences that those plans are conditional on inflation remaining near its implicit goal of 2 percent and below 2.5 percent.
New data about the Fed’s preferred inflation measure released on Thursday showed near-record low inflation. The personal consumption expenditures index showed a year-over-year change of just 1 percent. Excluding food and energy, the number was 1.1 percent. Other measures of inflation have been similarly low, and longer-term inflation expectations have fallen in recent weeks.
Powell addressed concerns about inflation in his speech, professing “no doubt” that the Fed “defend the inflation goal ‘from below,’ if necessary.” Bernanke made a similar point in his press conference the week before. Both also suggested that the low inflation readings may be due partly to “transitory” factors, such as slowing global growth and falling oil prices. Whether speculators are convinced by their reassurances will become clear in the days ahead.