Taper Tipoff? Bernanke Hints Easing End Is Nearing
By: Jeff Cox | CNBC.com Senior Writer
Jin Lee | Bloomberg | Getty Images
Traders work on the floor of
the New York Stock Exchange (NYSE) as Ben S. Bernanke, chairman of the
U.S. Federal Reserve, speaks on television in New York, U.S.
The Federal Reserve will keep its version of the monetary printing press running a while longer, though Chairman Ben Bernanke provided hints Wednesday that the days of extreme easing are coming to a close.
At a news conference, the central bank chief said if the economy continues to improve the asset-purchasing program could start winding down towards the end of 2013 and wrap up in 2014.
Markets sold off aggressively on the news, with major averages dropping more than 1 percent. The five-year Treasury note hit its highest yield since August 2011 while the benchmark 10-year note breached a 2011 high.
Click here for market reaction.
Bernanke Clarifies Potential Plan to Reduce Purchases
CNBC's Steve Liesman asks
Federal Reserve Chairman Ben Bernanke to clarify his statement,
"gradually reduce purchases beginning later this year, and ending next
year when the unemployment hits 7 percent." Liesman asks if that was a
decision by the FOMC?
"Stocks and bonds do not like the prospect,
which appears somewhat short-sighted given what it means about firming
growth and therefore earnings as well as how long the Fed is likely to
remain a major player in the interest rate market," said Andrew
Wilkinson, chief economic strategist at Miller Tabak.
"Bernanke explicitly reaffirmed that its bond-buying process should continue to exert downside pressure to bond yields thus supporting the economic recovery," he added.
In a decision eyed with a surgeon's precision on Wall Street, the central bank's Open Market Committee tiptoed around the vaunted "tapering" question, saying it will continue watching the economy for more gains.
The Fed itself more or less met market expectations for this week's meeting, though some traders thought it would lay out a groundwork that could lead to at least a modest tightening of its $85 billion a month bond-buying program by September.
Bernanke said scale-backs in the asset purchasing program will only happen if the economic data gets better. Interest rate hikes, he said, are a separate issue and "still far in the future."
(Read More: Bernanke Won't Touch His Private Exit Strategy)
While the Fed's economic forecast indicated some mild optimism for growth, Bernanke said investors shouldn't read too much into that in terms of Fed policy.
"If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy," he said.
In other matters, Bernanke refused to address questions about his future at the Fed as his second term winds to a close. President Barack Obama caused a stir this week when he said the chairman had stayed on longer than he intended.
The Fed statement changed little from the May meeting, though it did sound a modestly upbeat note on the economy.
"We pretty much have a Fed statement and summary of economic projections that leave us believing what we believed yesterday, which is the Fed is going to taper at some point, maybe at the end of this year, maybe in 2014," said Art Hogan, managing director at Lazard Capital Markets.
"Bernanke explicitly reaffirmed that its bond-buying process should continue to exert downside pressure to bond yields thus supporting the economic recovery," he added.
In a decision eyed with a surgeon's precision on Wall Street, the central bank's Open Market Committee tiptoed around the vaunted "tapering" question, saying it will continue watching the economy for more gains.
The Fed itself more or less met market expectations for this week's meeting, though some traders thought it would lay out a groundwork that could lead to at least a modest tightening of its $85 billion a month bond-buying program by September.
Bernanke said scale-backs in the asset purchasing program will only happen if the economic data gets better. Interest rate hikes, he said, are a separate issue and "still far in the future."
(Read More: Bernanke Won't Touch His Private Exit Strategy)
While the Fed's economic forecast indicated some mild optimism for growth, Bernanke said investors shouldn't read too much into that in terms of Fed policy.
"If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy," he said.
In other matters, Bernanke refused to address questions about his future at the Fed as his second term winds to a close. President Barack Obama caused a stir this week when he said the chairman had stayed on longer than he intended.
The Fed statement changed little from the May meeting, though it did sound a modestly upbeat note on the economy.
"We pretty much have a Fed statement and summary of economic projections that leave us believing what we believed yesterday, which is the Fed is going to taper at some point, maybe at the end of this year, maybe in 2014," said Art Hogan, managing director at Lazard Capital Markets.
Fed: No Change in Purchase Program
There is no change in the Fed
purchase program, reports CNBC's Steve Liesman. The Federal Reserve
says the labor market conditions have improved, but jobless rates are
elevated.
Bernanke said discussion at the meeting
did yield one other change: A desire to hold onto its mortgage-backed
securities, which it is buying to spur economic growth.
"While participants continue to think that in the long run the Federal Reserve portfolio should consist predominantly of Treasury securities, a strong majority now expects that the committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy," he said.
In its economic projections, the committee modestly raised its expectations for gross domestic product growth for 2014, from 2.9 to 3.4 percent to 3.0 percent to 3.5 percent. Bernanke had never presided over an economy that grew more than 3 percent on an annualized basis.
"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," the statement said.
(Read the full Fed statement here)
Markets have been intent on finding signs for when the Fed will end its quantitative easingprogram, which has driven the central bank balance sheet to $3.45 trillion and sparked worries about asset bubbles in risk assets.
The Fed credits itself with funds that it uses to buy Treasurys and mortgage-backed securities.
"While participants continue to think that in the long run the Federal Reserve portfolio should consist predominantly of Treasury securities, a strong majority now expects that the committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy," he said.
In its economic projections, the committee modestly raised its expectations for gross domestic product growth for 2014, from 2.9 to 3.4 percent to 3.0 percent to 3.5 percent. Bernanke had never presided over an economy that grew more than 3 percent on an annualized basis.
"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," the statement said.
(Read the full Fed statement here)
Markets have been intent on finding signs for when the Fed will end its quantitative easingprogram, which has driven the central bank balance sheet to $3.45 trillion and sparked worries about asset bubbles in risk assets.
The Fed credits itself with funds that it uses to buy Treasurys and mortgage-backed securities.
Bernanke Not Commenting on Plans
Ylan Mui of the Washington
Post asks Fed Chairman Ben Bernanke about President Obama's assessment
of his term and whether he plans to step down at the end of his term.
As part of a historic level of easing,
the Fed also has kept its target funds rate near zero, where it will
stay until unemployment falls to 6.5 percent and inflation rises to 2.5
percent. The jobless rate currently stands at 7.6 percent while
inflation is tracking at 1.4 percent.
(Read More: Placing Odds on Who Will Succeed Bernanke)
"Wall Street has already traded out those statements and bulls will now focus on the comments about the likelihood of an increase in rates not occurring until 2015," said Todd Schoenberger, managing partner at LandColt capital in New York. "Keeping rates low indicates a continued bull run in equities for the foreseeable future."
In its statement Wednesday, the Fed forecast the jobless target will be hit in 2014. It also cut its inflation outlook.
Critics also have wondered why the central bank continues in extreme easing mode even though the economy is well enough the financial crisis-era levels and the S&P 500 stock index has gained more than 140 percent since the March 2009 lows.
In anticipation that the Fed will unwind the third leg of QE, stocks have been choppy though generally higher while the 10-year Treasury yield has climbed to 2.21 percent, recently hitting its highest level since late-March 2012 and up more than half a percentage point from the 1.66 percent at the May fed meeting.
The FOMC voted 10-2 in favor of the statement, with dissent coming from James Bullard, who wanted stronger language about the Fed's inflation goal, and Esther George, who is worried about "the risks of future economic and financial imbalances" and higher inflation.
_ By CNBC's Jeff Cox. Follow him
(Read More: Placing Odds on Who Will Succeed Bernanke)
"Wall Street has already traded out those statements and bulls will now focus on the comments about the likelihood of an increase in rates not occurring until 2015," said Todd Schoenberger, managing partner at LandColt capital in New York. "Keeping rates low indicates a continued bull run in equities for the foreseeable future."
In its statement Wednesday, the Fed forecast the jobless target will be hit in 2014. It also cut its inflation outlook.
Critics also have wondered why the central bank continues in extreme easing mode even though the economy is well enough the financial crisis-era levels and the S&P 500 stock index has gained more than 140 percent since the March 2009 lows.
In anticipation that the Fed will unwind the third leg of QE, stocks have been choppy though generally higher while the 10-year Treasury yield has climbed to 2.21 percent, recently hitting its highest level since late-March 2012 and up more than half a percentage point from the 1.66 percent at the May fed meeting.
The FOMC voted 10-2 in favor of the statement, with dissent coming from James Bullard, who wanted stronger language about the Fed's inflation goal, and Esther George, who is worried about "the risks of future economic and financial imbalances" and higher inflation.
_ By CNBC's Jeff Cox. Follow him
@JeffCoxCNBCcomon Twitter.
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