Doug Mills/The New York Times The Fed said that risks to the recovery have diminished since last fall. Above, Ben S. Bernanke, the Fed chairman, speaking on Wednesday.The Federal Reserve's policy statement and news conference were awaited with unusual anticipation by economists and investors looking for clues about when the central bank might curtail its stimulus programs. The markets have been in turmoil since the Fed chairman, Ben S. Bernanke, said at a May 22 hearing that a change could come “in the next few meetings†of the Fed's policy making board. Here is an account of how the statement and Mr. Bernanke's appearance unfolded.
Mr. Bernanke has just wrapped up his news conference, in a hair under an hour.
The Fed continues to undershoot its own inflation target and unemployment remains uncomfortably high. But the central bank has shown no interest in expanding its pace of asset purchases to nudge inflation up while continuing to help bring unemployment down.
Responding to a question about that apparent paradox, Mr. Bernanke responded that the Fed would “like to get inflation up to our target,†saying that it is “entirely wrong to say we're not concerned about it.†He stressed that the bank believed low inflation would hold back the recovery, by retarding the pace of household deleveraging and effectively increasing real interest rates. But he said that inflation seemed to be low for some transitory reasons, such as a temporary swoon in prices for medical care. “We expect inflation to come back up,†he added.
- Annie Lowrey
The more Mr. Bernanke has said, the more investors seem to fear that an end to the Fed's stimulus programs are drawing nearer.
Leading stock indexes have dropped sharply since Mr. Bernanke began speaking, taking the Standard & Poor's 500-stock index down 1 percent in recent trading, the low point for the day.
Part of the reason given for the sell-off is Mr. Bernanke's comments about a threshold of a 7 percent unemployment rate for beginning to slow down Fed bond purchases. Before today, the Fed has said it has a 6.5 percent threshold for raising interest rates, but there had been few indications of a different threshold for the bond purchasing program. A 7 percent threshold suggests that a tapering of bond buying may be closer than expected.
More broadly, Mr. Bernanke has made repeated comments about the positive trends in the United States economy and the housing market. If the Fed sees economic recovery, that is likely to lead to an end to the Fed support that the market has been so reliant on. In the current economy, such good news is viewed by investors as bad news.
- Nathaniel Popper
Nelson D. Schwartz of The Times has annotated a comparison of the statement issued after the Federal Open Market Committee meeting that just ended and the previous statement in May.
Mr. Bernanke said he did not believe that the Federal Reserve's purchases of mortgage-backed securities were swamping or distorting the broader housing finance market. He noted that despite the Fed's aggressive purchase of mortgage-backed assets, it retained just a “fraction†of the overall volume of such assets. “Our assessment is that the M.B.S. market is still a quite healthy market,†he said.
But he did note that the government, writ large, is the mortgage market for all intents and purchases at the moment. “Fannie and Freddie are basically it,†he said, referring to Fannie Mae and Freddie Mac, the bailed-out mortgage giants that are financing a large majority of new home loans. And he noted the broader debate over Washington's role in the market in the future.
- Annie Lowrey
Here is the Fed's forecast for the American economy: It will improve, but not right away. But a s for when, Fed officials have not the foggiest idea.
The Fed released the opinions of the participants in meetings of the Federal Reserve's Open Market Committee on where the Federal Funds rate would be at the end of 2015, “assuming appropriate monetary policy.â€
The responses were rounded to the nearest quarter percent. Here they are:
- 0.25 percent - 1
- 0.5 percent - 2
- 0.75 percent -3
- 1 percent - 4
- 1.25 percent - 2
- 1.5 percent - 3
- 2 percent - 1
- 3 percent - 3
Asked where they thought the rate would be in the “longer run,†they were less split. The responses ranged from 3.25 percent to 4.5 percent. That time presumably is after we have a full recovery.
Robert Barbera, the co-director of the Center for Financial Economics at Johns Hopkins University, said the 201 5 forecasts looked as if they had come from “a random number generator.†They know where they want to go, he said, pointing to the longer-run figures, “but they are clueless about how the transition will proceed.â€
All but one of them think the rate will be around 0.25 percent at the end of this year, and all but four think it will be there at the end of 2014, although one of those expects it to get up to 1.5 percent by then.
Perhaps Wall Street, which swooned last month at hints that an end to quantitative easing might be near, will take comfort from the shorter-term consensus.
- Floyd Norris
The Fed has tried to clarify its policies for market participants, including through news conferences such as the one going on. But more communication comes with its own pitfalls.
Asked by my colleague Binyamin Appelbaum to clarify what substantial improvement in the economy and labor markets might mean in policy terms, Mr. Bernanke responded, “Substantial is in the eye of the beholder.â€
Mr. Bernanke noted that the Fed's extraordinary asset purchases came with risks and uncertainties not associated with the central bank's usual policy lever of lowering interest rates. The idea is to get some “near-term momentum to get the economy moving forward into a sustainable recovery,†he said. Low interest rates would then “carry us through.â€
He summed it all up with a strange metaphor: ending the extraordinary policies is like trying “to land the ship in a smooth way onto the aircraft carrier.â€
He added later, “We are determined to be as clear as we can,†saying he hoped listeners would be able “to follow what we're saying.â€
- Annie Lowey
At the news conference, Mr. Bernanke is stressing that the Fed's policy is going to be responsive to what is happening in the economy: “If you draw the conclusion that I've just said that our policies, our purchases, will end in the middle of next year, you've drawn the wrong conclusion,†he said. If the Fed's forecasts are overly optimistic or pessimistic, he indicated, it remains ready to change course.
- Annie Lowrey
Mr. Bernanke took steps to ease some of the concerns swirling around the mortgage market.
In recent years, the Fed's purchases of mortgage-backed bonds have helped push down mortgage rates, which has helped stimulate the housing market and the economy.
In recent weeks, mortgage rates have leaped as worries about the Fed stepping off bond purchases have swirled. This, in turn, has generated concerns about the housing market recovery.
Mr. Bernanke said in his opening remarks that when the Fed did start easing its bond purchases, it would start with Treasury bonds, not mortgage bonds. That will put more pressure on Treasury bonds, but could help ease the r ecent selling of mortgage-backed bonds.
- Nathaniel Popper
For what might be the first time, Ben S. Bernanke has made policy news at a news conference.
Mr. Bernanke announced an unemployment-rate target at which it might start to taper its asset purchases: 7 percent. Judging by the Fed's own projections, that would mean the taper would be coming toward the end of this year.
The purpose of the announcement is to reduce confusion, it seems. “It was thought it might be best for me to explain that,†Mr. Bernanke said at the news conference.
- Annie Lowrey
This month, there were two dissenters to the Fed's policy of keeping up its asset purchases at a pace of $85 billion a month, a hawk and a dove.
Esther L. George of the Federal Reserve Bank of Kansas City, the hawk, “was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,†the Fed said. The idea is that the Fed might be overextending itself or blowing bubbles, with potentially serious consequences.
But James B. Bullard of the Federal Reserve Bank of St. Louis “believed that the committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.†To translate, Mr. Bullard indicated concern that inflation was undershooting the Fed's own targets. Why might low inflation be a bad thing? For one, it reduces the incentive to invest. It also makes it harder for debt holders, like homeowners who are underwater on their mortgages or struggling with hefty student loan payments, to pay that money back.
- Annie Lowrey
The policy-making committee says that downside risks have “diminished†since the fall; it nudged down its unemployment estimate for this year and the following two years as well. Still, it lowered its estimate of economic output for this year, and tweaked its following-year projections as well.
Here is a comparison of its estimates for real economic growth:
For 2013:
- March estimate: 2.3 to 2.8 percent
- June estimate: 2.3 to 2.6 percent
- Higher or lower? A bit lower
For 2014:
- M arch estimate: 2.9 to 3.4 percent
- June estimate: 3 to 3.5 percent
- Higher or lower? A bit higher
For 2015:
- March estimate: 2.9 to 3.7 percent
- June estimate: 2.9 to 3.6 percent
- Higher or lower? A bit lower
- Annie Lowrey
Bond investors look as if they are taking the Fed statement as a signal that the central bank will soon ease off its bond-buying programs.
The yield on the benchmark 10-year Treasury note, which goes up when investors sell the bonds, has shot up since 2 p.m. and was recently trading at 2.27 percent, up from 2.17 percent on Tuesday evening. The selling takes the yield on United States government bonds to their highest level since March 2012.
Dan Greenhaus, the chief global strategist at BTIG, wrote that investors were responding to the Fed's statement that the “downside risks to the outlook for the economy†had “diminished since the fall.†An improving economy will eventually lead the Fed to decrease its stimulus measures.
“That's not good for bonds but ultimately will be good for stocks,†Mr. Greenhaus wrote.
- Nathaniel Popper
The unemployment picture seems to be looking better, the Fed thinks.
In new economic pr ojections, the central bank estimates that the unemployment rate will fall to between 6.5 and 6.8 percent in 2014. In March, it put its projections a bit higher, at 6.7 percent to 7 percent. The same goes for 2015. The Fed now says it believes that the jobless rate will be somewhere between 5.8 and 6.2 percent, where it had forecast somewhere between 6 and 6.5 percent in March.
The Fed also tamped down its inflation projections for next year and the year after. For 2014, the Fed expects core inflation of just 1.5 percent to 1.8 percent, down from an estimate of 1.7 percent to 2 percent as of March. It sees inflation picking up slightly in 2015, though to lower levels than it saw just a few months ago, as well. The levels of inflation indicated in the report remain below the Fed's own target of 2 percent.
- Annie Lowrey
Stock markets shot up and then dropped back down immediately after the Fed released its latest policy statement.
The markets reflected a tug of war between traders over the meaning of the Fed's statement. The Standard & Poor's 500-stock index to hit both its highs and its lows for the day in the minutes after the statement was posted, but the negative sentiment seemed to be winning out.
On the positive side, the Fed said the open market committee “decided to continue purchasing†bonds, calming the concerns that the Fed could slow down its purchases in the coming months.
But the statement also suggested that the economic picture is improving, which is likely to eventually lead the Fed to slow down its purchases. Some tra ders see that as a potential negative for the market, at least in the near term.
- Nathaniel Popper
No signs of a taper here.
The Federal Reserve's policy-making committee, in a statement following a regularly scheduled meeting, has said that it intends to continue its current pace of bond purchases, designed to bring down interest rates and more generally help an economy still struggling in the wake of the recession.
“The Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer -term Treasury securities at a pace of $45 billion per month,†a policy statement said. All in all, the extraordinary policies “should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.â€
That might come as something of a relief to investors. Chairman Ben S. Bernanke had indicated at a Congressional hearing earlier this year that the central bank might start to “taper†its pace of new purchases in the coming months, essentially starting to ease its foot off of the accelerator though not putting it on the brake. Nevertheless, that has caused some queasiness in the markets, particularly given that the recovery remains weak by historical standards. It has also raised the question of how long the Fed can keep on expanding its balance sheet, with some analysts worrying about diminishing returns and the risks associated with the Fed soaking up so many assets.
- An nie Lowrey
Here's t he announcement from the Federal Open Market Committee.
And the first take from Binyamin Appelbaum, with the headline: Fed, More Optimistic About Economy, Maintains Bond-Buying.
Market reaction so far is muted.
Here is how a few analysts and economists are preparing their clients for the Fed's announcement:
Eric Green, global head of rates research. TD Securities: “The Fed can and will stay on message, and still provide some hot tea and a wooly blanket to a market shivering under the cold light of tapering. We do not expect any major changes to the post meeting statement, no quantitative guideline to the scaling back QE, and no fundamental changes to economic forecasts that will continue to show escape velocity is fast approaching. The Fed has the incentive to stay on message.â€
Kevin Pleines, equity market analyst at Birinyi Associates: “While the press would have one believe that drastic action is imminent, only five of the 75 economists surveyed by Bloomberg expect an increase in the Fed funds rate by the second quarter of 2014. That being said, 76% of economists surveyed believe the Fed will announce a reduction in bond buying by at least their December meeting.â€
Andrew Wilkinson, chief economic strategist at Miller Tabak & Company: “If you could imagine being a psychiatrist sitting down pencil in hand with a relaxed Ben Bernanke as your patient, what would you ask him? None of the journalists attending today's FOMC press conference will want to waste a question on something as simple as when he might taper, because surely, someone else will do that for the benefit of everyone else in the room. So what should the shrink ask t o help get better insight to the Chairman's thought process?â€
Jim Reid, head of global credit strategy, Deutsche Bank: “Today could dictate the rest of the summer and decide whether it will be one of very short or long nights for markets. The reality is that not much has changed data wise since Bernanke's JEC testimony on May 22nd and therefore he has an opportunity to say that the Fed are still data dependent and leaving no set timetable for tapering.â€
- Nathaniel Popper
Markets are in a state of almost eerie calm as investors await the Federal Reserve statement.
Through early aft ernoon, the major stock indexes were trading within 0.2 percent of Tuesday's close. Traders have talked about saving up their firepower to respond to the Fed later in the day. A note from RBS strategists said that the markets they were watching “were very narrow as we wait for today's Fed meeting.â€
This is a sharp departure from the volatility in the markets over the last few weeks, as investors have furiously tried to divine the Fed's future intentions and prepare their portfolios for any change.
Since Mr. Bernanke said on May 22 that the central bank could look at changing policy “in the next few meetings,†the Standard & Poor's 500-stock index has had five days with at least a 1 percent move.
On days when it appeared that the Fed might be preparing to pull back on the stimulus, stocks have generally sold off, while indications that the Fed might continue on with the stimulus have led markets up. The swings back and forth have left the benchmark index down slightly from where it was on May 22.
Some of the most serious action has been taking place in the bond markets, which are particularly sensitive to the possibility that the Fed could step back from its purchases of government and mortgage bonds. The yield on the 10-year Treasury note, which goes up when investors sell bonds, has risen from 1.6 percent in early May to 2.2 percent on Tuesday. This has pushed up mortgage rates, which has already driven down the number of homeowners refinancing their mortgages.
Much of the activity has been about preparing for what the Fed's statement will say, and how Mr. Bernanke will explain it in his news conference. If Mr. Bernanke gives any indication that the Fed is looking at “tapering†its bond purchases, stocks and bonds are expected to sell off.
There are also some hopes that Mr. Bernanke will provide clarity about whether he plans to leave the Fed when his term runs out in January, which would probably influence the future direction of Fed policy.
- Nathaniel Popper
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