Lagarde Says Fed Must Communicate to Quell Fear in Exit
Federal Reserve Chairman Ben S. Bernanke, who spurred market volatility by signaling the central bank will scale back its unprecedented bond buying, must communicate exit plans clearly to prevent future tumult, said International Monetary Fund Managing Director Christine Lagarde.
“Clearly what happened, it was an announcement that took the markets by surprise,” Lagarde said in an interview on MSNBC today. “What he’s probably doing is announcing, giving signals, and giving expectations and managing expectations, which is always extremely difficult when markets react so feverishly.”
Bernanke said June 19 the central bank may start dialing down its bond-buying this year and end it in mid-2014 if the economy achieves the sustainable growth the Fed seeks. He spoke at a press conference after the Federal Open Market Committee left the monthly pace of bond purchases unchanged at $85 billion.
The remarks prompted a surge in the dollar and a slump in U.S. Treasuries. The Standard and Poor’s 500 Index (SPX) dropped 4.8 percent to a June 24 close of 1573.09 from 1651.81 on June 18. It has since regained ground to close at 1603.26 yesterday.
“It’s not just last week -- it goes back to May 22, when he started talking about the tapering,” Lagarde said. On that day, Bernanke said in remarks to Congress that the Fed could “step down” the pace of asset purchases if the labor market improves and “we have confidence that that is going to be sustained.” Bernanke also said a premature withdrawal from easing would put the economic recovery at risk.
Lagarde said “there has been some correction,” and the Commerce Department’s downward revision of first-quarter gross domestic product growth this week should help to reassure investors that “tapering is not around the corner, as they had feared.”
“The United States is in second gear, if you will, moving on and out of the crisis better than the Europeans,” Lagarde said. “There seems to be that disconnect between what happens at a political level and what happens at an economic level.”
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