Thursday, July 18, 2013

The Fed’s Message: One More Time (excerpt)

When Fed Chairman Ben Bernanke outlined the FOMC’s plan for phasing out QE at his press conference on June 19, the S&P 500 dropped 1.4% that day and 2.5% the following day. When he repeated the plan yesterday during his congressional testimony, the market rose slightly, remaining near its recent record high.

Bernanke said that the FOMC will start tapering QE “later this year” if the economy continues to improve and inflation moves back toward 2%: “And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. Such outcomes would be fully consistent with the goals of the asset purchase program that we established in September.”

However, that’s not a “preset course.” In any event, he reiterated that the Fed’s forward guidance pledges to keep the federal funds rate near zero “at least as long as” the unemployment rate remains above 6.5%. If inflation remains persistently below 2%, then the federal funds rate will remain near zero even if the jobless rate is down to 6.5%.

The market’s reaction to Bernanke’s “Can you hear me now?” testimony suggests that the answer is “Yes, now we can!” The Fed may or may not taper QE depending on the performance of the economy. In any event, highly accommodative monetary policy will persist for the foreseeable future.

For now, the Fed will continue to buy $40 billion per month in agency MBS and $45 billion per month in Treasuries.

Today's Morning Briefing: Mixed Signals. (1) Useful vs. useless information. (2) Paul Newman & Ben Bernanke. (3) Fed: Clearer message, but weaker signal. (4) Is the labor market really improving? (5) Dropouts. (6) Housing indicators are blowing hot and cold. (7) Outlook for earnings looks better than for revenues. (8) Here comes another sequester. (More for subscribers.)

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