Fed’s Williams Says Taper Speculation Has Cut Bond Market Froth

Federal Reserve Bank of San Francisco President John Williams said speculation over tapering of quantitative easing that drove Treasury yields higher may have helped eliminate some “froth” in the bond market.

Some investors “were thinking the Fed was going to keep buying forever, QE infinity,” Williams said today in a CNBC television interview from Jackson Hole, Wyoming. “We had always communicated that that’s not what our plan was.”

“Some of the adjustment in the bond market probably was kind of bringing people back to reality that this was a program that wasn’t going to continue forever,” he said. “And I think that, maybe, eliminates some of the froth in the bond market.”

Treasury 10-year yields touched a two-year high of 2.93 percent earlier this week on speculation the Federal Open Market Committee will slow its large-scale asset purchases next month. Policy makers are weighing when to begin reducing $85 billion in monthly bond buying, which they have pledged to maintain until the job market improves substantially.

Williams, who has never dissented from a policy decision, said whether tapering takes place later this year depends on economic conditions.

“The decision when and if to taper later this year will depend on the data, and specifically are we still seeing signs of positive momentum,” Williams said. “I’m not going to speak about what meeting or not, but I do think that if the data continue to progress as we’ve seen, then I do agree that we should edge down or taper our purchases later this year.”

Fed Minutes

Minutes of the last FOMC meeting released this week show policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper purchases this year if the economy strengthens, with a few saying a reduction may be needed soon.

“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” minutes of the July 30-31 meeting show.

The FOMC will probably vote at its Sept. 17-18 meeting to taper the unprecedented stimulus program, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13. The first step may be to scale back monthly purchases by $10 billion to a $75 billion pace, according to the median estimate in the survey of 48 economists. They said buying will probably end by mid-2014.

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