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Bernanke Seeks to Divorce QE Tapering From Interest Rates

Bernanke Seeks to Divorce QE Tapering From Fed Rate Outlook
Bernanke has said the Fed may start reducing $85 billion in monthly bond purchases later this year, assuming economic growth meets the Fed’s predictions. Photographer: Andrew Harrer/Bloomberg

July 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will have a chance to use testimony to Congress today to drive home his message that winding down asset purchases won’t presage an increase in the Fed’s benchmark interest rate.

Bernanke has said the Fed may start reducing $85 billion in monthly bond purchases later this year, assuming economic growth meets the Fed’s predictions. At the same time, policy makers’ forecasts have indicated the federal funds rate won’t rise until 2015, long after Bernanke’s second term ends Jan. 31.

“The Fed’s bifurcated message will continue,” said Michael Gapen, senior U.S. economist at Barclays Plc in New York and a former Fed economist. “Their outlook is for an environment where we can start tapering -- so a hawkish tone on tapering switching to a dovish tone on rate hikes.”

Investors in federal funds futures are starting to absorb Bernanke’s message. They see a 44 percent chance that the central bank will raise interest rates from close to zero before the end of 2014, according to data compiled by Bloomberg. That’s down from 53 percent on July 10, the day before Bernanke said “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.”

Bernanke, 59, will appear before House members today and senators tomorrow to present the Fed’s semi-annual monetary policy report. His statement to the House Financial Services Committee is set for public release at 8:30 a.m., 90 minutes before he delivers it to lawmakers. In the past, the testimony was released at 10 a.m.

Treasury Yields

Treasury 10-year note yields were little changed at 2.53 percent as of 8:38 a.m. London time. They touched 2.51 percent yesterday, the lowest since July 5, in anticipation of Bernanke’s testimony, even as economic reports showed that U.S. industrial production rose by the most in four months in June and inflation picked up toward the Fed’s goal, supporting the case for a reduction in quantitative easing.

“He’ll say a slowing in the pace of asset purchases isn’t a tightening of policy, and it’s actually still an easing of policy just at a slower pace,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion, and a former Fed senior economist. “It doesn’t imply that they’re going to be tightening policy any time soon. They’re not.”

Global stocks and bonds retreated after Bernanke on June 19 outlined the conditions that would prompt the Federal Open Market Committee to reduce and eventually end asset purchases. His remarks pushed the yield on the benchmark 10-year Treasury to a 22-month high and erased $3 trillion in value from global equity market value over five days.

Market Reaction

Bernanke may say markets “vastly overdid it,” said Adam Posen, president of the Peterson Institute for International Economics in Washington and a former member of the Bank of England’s rate-setting Monetary Policy Committee.

The Fed chief also may signal that while policy makers aren’t committed to a fixed timetable for tapering, they “actually read the labor-market indicators as good,” Posen said in an interview yesterday in Washington.

Anshu Jain, co-chief executive officer of Deutsche Bank AG, continental Europe’s biggest bank by assets, said that as a “market participant, I’m very glad that we’re getting a slow, smooth, continuous adjustment as opposed to a highly volatile one, particularly in credit and mortgage markets.”

“Policy makers have been very careful in the U.S. to point out the distinction between monetary policy and bond-buying,” Jain said in an interview with Bloomberg Television’s Haslinda Amin today in Singapore.

Payroll Gains

Payrolls increased by 195,000 in June for a second straight month, the Labor Department reported July 5. The report capped 12 consecutive months of advances above 100,000 -- the longest such streak since the 33 months ended in May 2000. Hiring gains have averaged 201,830 this year, compared with 182,750 in 2012.

Federal Reserve Bank of Kansas City President Esther George, who has consistently voted this year against additional stimulus, said yesterday that recent job-market gains add to the case for a reduction in quantitative easing. George has dissented on concern the stimulus may destabilize financial markets and increase inflation risks.

“The labor market has shown now for the last six months pretty steady gains of close to 200,000 per month,” she said in an interview with Fox Business Network. “That is a good indicator that there has been sustained improvement here and I think it would be appropriate given the size of our balance sheet and the level of accommodation that we begin to make adjustments that reflect that improvement.”

Growth Projections

Gains in housing and autos are lifting projections for growth in the second half of the year after federal budget cuts weighed on the expansion. New-home sales in May jumped to 476,000, the fastest annualized pace since July 2008. Cars and light trucks sold at a 15.9 million seasonally adjusted annualized rate in June, the strongest since November 2007.

The economy expanded at a 1.6 percent rate in the second quarter, according to the median of 68 responses in a Bloomberg survey conducted July 5 to July 10. Growth is forecast to accelerate to a 2.3 percent pace in the third quarter and 2.6 percent in the fourth.

Fed officials forecast the economy will grow 2.3 percent to 2.6 percent this year, according to estimates released on June 19. They see the jobless rate falling to 7.2 percent to 7.3 percent, compared with 7.6 percent in June.

Reports yesterday showed factory output climbed 0.3 percent in June, the biggest gain since February, and homebuilder confidence was at its highest this month in seven years.

Inflation Report

Consumer prices increased a more-than-projected 1.8 percent in the 12 months through June, up from a 1.4 percent year-over-year gain the prior month, a separate report showed.

Bernanke today may also renew calls on lawmakers to avoid sharp short-term spending cuts, which he has said could harm the economy in the near term, while adopting a plan to lower long-term fiscal deficits.

In May 22 testimony before the Joint Economic Committee, Bernanke said “the Congress and the administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”

Shrinking deficits may postpone until October or November the deadline this year for raising the $16.7 trillion debt ceiling. The Obama administration projected this month that the federal budget deficit will drop to the lowest level in five years, $759 billion for the year ending Sept. 30, as the economy improves and tax collections increase.

“The near term fiscal outlook has brightened quite a bit,” Feinman said. “Near-term pressure to do something about the deficit is receding politically.”

To contact the reporters on this story: Joshua Zumbrun in Washington at; Jeff Kearns in Washington at; Michelle Jamrisko in Washington at

To contact the editor responsible for this story: Chris Wellisz at

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