On Wednesday, Chairman Ben Bernanke tried to clarify the Federal Reserve’s plans for slowing down its large-scale bond purchases and convince investors they should not be worried about the Fed withdrawing support.
A day later, it appears he succeeded in the first of those goals, but not the second.
Stock markets continued to slide Thursday, with the Dow Jones, S&P 500, and NASDAQ all finishing down more than 2 percent. Commodities also fell, with gold down 7 percent. Yields on government bonds rose, with the 10-year Treasury rate closing at 2.41 percent, the highest level in over a year.
The Fed’s Wednesday announcement isn’t the only possible culprit in the sell-off. News of sharply tightening financial conditions and unfavorable economic indicators in China were likely also a factor. Government bonds across the world, not just in the U.S., dropped in price.
Nevertheless, there is plenty of evidence to suggest that Wednesday’s Fed announcement and press conference by Bernanke were taken as a tightening of monetary conditions.
In particular, inflation expectations fell, with the spread between 10-year Treasuries and 10-year Treasury Inflation-Protected Securities, a gauge of inflation expectations, falling to 1.97 percentage points, the lowest level since January 2012, according to Bloomberg.
At his Wednesday press conference, Bernanke was careful to spell out the exact thresholds at which the Fed would slow down the pace of its stimulus purchases, adding a new level of detail to the central bank’s plans when he announced 7 percent unemployment as the key metric for slowing bond buys (current unemployment is 7.6 percent).
Although Bernanke estimated that the Fed’s plans would mean “tapering” the bond purchases later this year, he stressed on multiple occasions during the question-and-answer session with the press that the schedule was conditional on the state of the economy. He said the Fed’s policy would depend on the economy improving, and that if it didn’t show the progress they expected, they would respond with additional easing.
Thursday’s numbers suggest that investors either did not understand Bernanke, or, more likely, do not find his statements credible.