Fed’s Bernanke: No Preset Course, Fixed Calendar on Tapering Asset Buys

September 18, 2013 11:07 AM

via a special arrangement with Informa Economics, Inc.

Fed chairman tries to make point several times, but key is whether markets will listen

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Tapering of the $85 billion per month in asset purchases is not "on a preset course" and there is "no fixed calendar" for such a decision and that will be dictated by US economic data, Fed Chairman Ben Bernanke stated today in his post-FOMC-meeting press conference.

Reporters tried to dig into the issue from several angles but got basically the same response from the Fed chairman – the data will drive the decision and the data to date did not support tapering of the asset purchases.

One reporter even asked Bernanke if the decision not to taper the asset purchases was intended to surprise the markets. Bernanke simply noted that their decision was a "precautionary step" based on the current economic data.

Some also referenced his June post-FOMC press conference in which he first talked about tapering the asset purchases, noting that could unfold sometime later this year. Asked why then it did not unfold this month when the markets expected it to, Bernanke simply said, "I don’t recall stating we would do anything in particular at [that| meeting."

Asked if the discussion of tapering at the June meeting fostered the heightened expectation for action this month, Bernanke said, "There is no alternative to monetary policy but to communicate as clearly as possible." He noted the discussion in June centered on a proposed strategy that would "take about a year for a total wind down to take place and that was contingent upon continued improvement" in the labor market.

Today’s decision not to taper the asset purchases, Bernanke continued, is "very consistent" with the discussion of this matter in June. "We needed to communicate now," he added. "Failing to communicate risked creating a very large divergence" and that could have had even more dire consequences down the road, he noted.

"The framework is still the same," Bernanke said of the Fed's process toward tapering the asset purchases, including continued gains in the labor market and inflation moving back to projected levels. "If the data confirm, we will take the first step, possibly later this year, and continue from there," he noted. But he again stressed the tapering was "not on a preset course" and that even when they move away from asset purchases, "our intent is to maintain a highly accommodative policy" relative to interest rates.

Bernanke said the bottom line remains: "If the data confirm our basic outlook, we could move later this year. But even if we do that, subsequent steps depend on data."

The accompanying updated economic forecasts from Fed members also were discussed during the press briefing, prompting Bernanke to remind that the goals laid out by the Fed were "thresholds, not triggers. The timing is not automatic." He added that the first interest rate increases could also come when the unemployment rate is "considerably below" the 6.5 percent threshold the Fed has identified.

Other highlights:

  • Unemployment remains stubbornly high but the improvement has largely come from more jobs created rather than the decline in the participation in the labor force.

  • On why interest rates for items like mortgages have gone up, Bernanke said it in part was from an "unwinding of excessively risky and leveraged positions in the market."

  • The Fed has been "over optimistic" on economic growth in the out years, he noted, in part that coming out of the financial crisis the potential growth have been slowed. "We have been too pessimistic on unemployment," he admitted.

  • Should the Fed opt to take a step at a time when no press conference is scheduled, they could set up a media call or "something to answer media questions."

  • Bernanke said that as for regrets on the financial crisis, he jokingly referred to Frank Sinatra and said, "My regrets are many." But perhaps his biggest regret was that they were unable to prevent it.

  • There would be "serious consequences" if the there is a government shutdown or a failure to raise the debt limit, Bernanke warned.

  • Bernanke is watching the situation with emerging markets as "problems in emerging markets can affect the US."

On his future, Bernanke was asked a three-part question to which he offered one answer: "I would prefer not to talk about my plans at this point."

Comments: Obviously Bernanke was trying to make clear to the marketplace that there is no set schedule for tapering the asset purchases and that the Fed was not locked into tapering the asset purchases at this meeting or any others at this point. That was a point that Bernanke repeatedly tried to make and clearly the decision was a surprise to the market given the reaction in stocks, the dollar and US Treasury bonds. Do the markets believe Bernanke? Only time will tell. But for now, they are surprised and the subsequent economic data will continue to be dissected for how it plays into the tapering decision.



NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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