Bernanke Says Fed May Delay QE Taper If Economy Misses Forecasts
Federal Reserve Chairman Ben S. Bernanke opened the door to a delay in reducing the central bank’s bond buying program, saying it will depend on data that economists say are falling short of the Fed’s own forecasts.
The Fed’s $85 billion in monthly asset purchases “are by no means on a preset course,” Bernanke said yesterday in his semiannual testimony to Congress. He added that the Federal Open Market Committee will “be responding to the data.”
Bernanke’s comments, which also emphasized the risks to the economy from federal budget cuts and slowing growth overseas, pushed Treasuries and U.S. stocks higher as investors reduced bets the Fed would start to trim bond purchases in September. His testimony is set to continue at 10:30 a.m. today before the Senate Banking Committee.
“Bernanke doesn’t seem to be in a hurry to taper,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who formerly worked for the New York Fed. “The probabilities of a September taper have come down.”
The Treasury 10-year yield fell four basis points, or 0.04 percentage point, to 2.49 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. It touched 2.46 percent, the lowest since July 3. The Standard & Poor’s 500 index rose 0.3 percent to 1,675.60, extending its gain for the year to 17.9 percent.
Bernanke said last month that the Fed may start to trim bond purchases later this year and end the program around the middle of 2014 if the economy meets its forecasts for growth of 2.3 percent to 2.6 percent for 2013, with unemployment projected to fall to 7.2 percent to 7.3 percent in the fourth quarter.
Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said that given his estimate for a 1 percent pace of expansion in the second quarter, growth would have to exceed a 3 percent rate in the second half to meet the Fed’s growth estimate for the year.
“The trajectory of the third quarter isn’t phenomenal,” Feroli said. “What I take from Bernanke’s remarks is the message that they aren’t totally confident. The odds of a September taper got nudged down a little.”
Recent reports on trade, inventories and consumer spending have prompted economists to mark down their estimates for second-quarter growth.
The trade deficit unexpectedly jumped in May as imports climbed to the second-highest level on record while exports stagnated. Inventories increased at a slower pace in May, and retail sales excluding autos were little changed in June.
St. Louis-based Macroeconomic Advisers LLC, which updates its estimate of GDP with each new piece of data, now forecasts the economy grew at an 0.7 percent annual rate in the second quarter, down from a 1.7 percent estimate at the start of July. The world’s largest economy expanded at a 1.8 percent pace in the first quarter.
The economy will expand at a 2.3 percent pace in the third quarter and 2.6 percent in the final three months of the year, according to the median of 68 responses in a Bloomberg survey of economists conducted July 5 to July 10.
Any further slowing in the economy would probably cause the Fed to reassess how fast asset purchases should be trimmed, said Tim Duy, an economist at the University of Oregon in Eugene who formerly worked at the U.S. Treasury.
Bernanke “pushed back against the idea that the path of scaling back quantitative easing is calendar dependent,” Duy said.
In his testimony, the 59-year-old Fed chairman said the 7.6 unemployment rate in June is “well above” normal levels while labor market conditions remain “far from satisfactory.”
“If the data are stronger than we expect, we’ll move more quickly” to reduce purchases, he told lawmakers. If data “don’t meet the kinds of expectations we have about where the economy’s going, then we would delay that process or potentially increase purchases for a time.”
Bernanke also said the Fed could keep buying bonds for longer if “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives.”
The 10-year Treasury yield rose as high as 2.74 percent this month from 1.93 percent on May 21, the day before Bernanke said the FOMC may trim its bond buying in its “next few meetings” if officials see signs of sustained improvement in the labor market.
The FOMC said in a June 19 statement that keeping the federal funds rate between zero and 0.25 percent “will be appropriate at least as long” as unemployment remains above 6.5 percent and the forecast for inflation in one to two years doesn’t exceed 2.5 percent.
Bernanke’s comments in June on tapering, and an employment report showing non-farm payrolls rose by 195,000 in both May and June, prompted economists such as Laurence Meyer, a co-founder of Macroeconomic Advisers, to focus on September as the probable date of a reduction in asset purchases.
Those perceptions were reinforced by June 28 comments by Fed Governor Jeremy Stein, who indicated September could be an appropriate time for the committee to make a decision.
Bret Barker, managing director and portfolio manager at Los Angeles-based TCW Group Inc., which manages $128 billion, said policy makers still have good reason to start tapering in September.
Minutes from Fed meetings show that several of the 19 FOMC members have been cautious about the costs and benefits of the third round of quantitative easing, raising questions about whether a delay in tapering would bring on more dissents.
Esther George, president of the Kansas City Fed, is the only voting member who has opposed the stimulus this year, saying it may destabilize financial markets and push up long-term inflation. Yet minutes from the June meeting said about half of the 19 FOMC participants wanted to end the program this year.
“Before, the message from the Fed seemed be the benefits outweighed the cost, while now it is the flipside,” Barker said, referring to bond purchases. Economic data would have to be “atrocious” to prevent a slowing in the pace of purchases in September. If data remains weak, Fed officials might opt to reduce purchases by $10 billion instead of $20 billion, he said.
The testimony to Congress may be the last for Bernanke, whose second four-year term ends in January. While the Fed chief hasn’t commented on his future plans, many congressmen in the House yesterday paid their respects to Bernanke.
“When it’s time for the T-shirts to be passed out at your retirement party,” said Representative Bill Foster, “a very good candidate” would be what the Illinois Democrat called a $18 trillion recovery in household net worth brought about by Bernanke’s policies. “It’s one of the most impressive achievements,” Foster said.
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