Bernanke Says Fed to Be Flexible on QE as Assets Rise
Chairman Ben S. Bernanke said the Federal Reserve would alter its monthly bond buying in response to gains in the job market, underscoring a need for flexibility as he expands Fed assets beyond a record $3 trillion.
“We may adjust the flow rate of purchases month to month to appropriately calibrate the amount of accommodation we’re providing, given the outlook for the labor market,” Bernanke said yesterday at a press conference after a two-day meeting of the Federal Open Market Committee. The Fed will adjust buying in a “sensitive way” based on several measures, including payrolls, wages and jobless claims.
Bernanke provided a clearer road map than ever before on what’s needed before the central bank trims its purchases while steering clear of any suggestion that a reduction in $85 billion in monthly bond buying is imminent. His comments pushed up stocks while Treasury yields remained higher.
“They are going to stay the course,” said Michael Hanson, a former economist with the Fed’s Monetary Affairs division. “Though the Fed is a little more optimistic about the labor market, it sounded like they are not very close to a substantial improvement” necessary for cutting the purchases, said Hanson, senior U.S. economist at Bank of America Corp. in New York.
The Fed, seeking to boost growth and heal a job market still scarred by the deepest recession since the Great Depression, also said it will leave its key interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.
The Standard & Poor’s 500 Index rose 0.7 percent to 1,558.71 and the yield on the 10-year Treasury note climbed to 1.96 percent from 1.9 percent on March 19.
The Fed’s monthly purchases will remain divided between $40 billion of mortgage-backed securities and $45 billion of Treasury securities, the FOMC said. The purchases are aimed at spurring the economy by lowering interest rates on everything from mortgages to car loans.
Echoing earlier language, the FOMC said the purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability” and that it will continue to reinvest maturing securities.
Bernanke in his press conference avoided highlighting a single indicator as the criteria for determining size of asset purchases, saying any pullback would be based on “a range” of variables. Trimming quantitative easing would also serve as a form of policy communication, signaling to investors “some sense of progress,” he said.
The Fed probably won’t cut its bond buying for several months as the U.S. economy weathers tighter fiscal policy, said Julia Coronado, chief economist for North America at BNP Paribas in New York, which deals directly with the Fed in government securities.
“They are going to want to see gains in the second quarter and the third quarter with enough strength that can offset the fiscal blow,” she said. “They want to be sure the economy has self-sustaining escape velocity.”
The FOMC decided yesterday to sustain its pace of bond purchases even as monthly payroll gains have averaged almost 200,000 since the central bank began its third round of quantitative easing on September 13. The unemployment rate has declined from 7.8 percent in September to 7.7 percent in February.
The FOMC’s central tendency forecasts released yesterday are for a jobless rate of 7.3 percent to 7.5 percent in the final quarter of 2013, falling to 6.7 percent to 7 percent in the final three months of next year. That’s still above the 6.5 percent benchmark the committee considers a threshold for when it may begin to increases the benchmark interest rate.
The majority of Fed officials don’t anticipate increasing the main interest rate until 2015, according to their estimates. They predict that unemployment will be 6 percent to 6.5 percent during the final three months of that year.
“Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated,” the FOMC said a statement yesterday. Policy makers also cited “more restrictive” fiscal policy and “downside risks to the economy.”
Some district bank presidents including St. Louis Fed President James Bullard have advocated adjusting central bank purchased to changes in the economy. Bullard during the past two months has urged altering monthly purchases by $10 billion to $15 billion at FOMC meetings depending on shifts in the outlook.
“We should think about tapering or adjusting central bank purchases to changes,” he said Feb. 1 in an interview. “If you get some good data for a couple of months, maybe you’d say, ‘Okay, we go back to $75 billion per month instead of $85 billion.’”
Bullard since 2010 has championed an incremental easing approach, saying the FOMC should use so-called quantitative easing as a tool similar to interest rate changes by not committing to an end date for the program.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have also endorsed tapering purchases before a halt in stimulus. Such an approach would avoid a potentially disruptive “cold turkey” end to buying, according to Fisher.
“They might cut the purchases of mortgage-backed securities by the fourth quarter this year, and perhaps Treasury purchases by the early part of next year,” said Michael Dueker, chief economist at Russell Investments in Seattle and a former economist at the St. Louis Fed.
Central bank officials estimate that in 2015 economic growth will accelerate to 2.9 percent to 3.7 percent.
“Excluding the public sector, the economy is growing close to 3 percent right now,” said Ballew, a Fed economist from 1988 until 1995. “You are seeing more positive signals than they expected maybe six months ago,” he said, referring to central bank officials.
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