Federal Reserve Chairman Ben Bernanke likened monetary policy to driving a car on Wednesday in trying to explain the central bank’s plan for tapering the purchase of Treasury bonds and mortgage-backed securities. He told reporters that the rate-setting Federal Open Market Committee “currently anticipates that it would be appropriate to moderate the pace of purchases later this year” and wind them down to nothing by the middle of 2014.
Stopping bond purchases isn’t the same as putting on the brakes, Bernanke said, it’s “akin to letting up a bit on the gas pedal.” Putting on the monetary brakes would entail selling bonds out of the Fed’s portfolio, and that’s not happening any time soon, Bernanke said. The Fed is also far away from raising the federal funds rate, which is the short-term interest rate that the Fed controls, the chairman said. He said that 14 of 19 participants in the FOMC’s deliberations expect the funds rate to start rising in 2015—and one thinks it won’t happen until 2016.
Bernanke stressed that the plan to end asset purchases by mid-2014 depends on how economic growth and inflation evolve in coming months, so the schedule could be either accelerated or delayed. “We also want to avoid inflation that’s too low,” he added, noting that the pre-conditions the Fed has established for beginning to tighten monetary policy aren’t triggers. “That’s a threshold, not a trigger.”
Bernanke refused to discuss what he called “my personal plans” when asked if he intended to seek a third four-year term as chairman. President Barack Obama, while praising Bernanke’s performance, said this week in an interview with Charlie Rose that he thought Bernanke had “already stayed a lot longer than he wanted or he was supposed to.”
In a statement released before Bernanke’s press conference, the rate-setting FOMC made no mention of the tapering that Bernanke discussed in his press conference. It stuck to its policy of buying $85 billion of Treasuries and mortgage-backed securities each month and said it will keep buying “until the outlook for the outlook for the labor market has improved substantially in a context of price stability.” That means it might stop buying if high inflation becomes a problem, which it clearly isn’t yet. And, no surprise, it said it will keep the federal funds rate at its rock-bottom level of 0 percent to 0.25 percent.
In its pre-conference statement, the committee said risks to the economy and job market have diminished since last fall. It said the job market has “shown further improvement,” although the unemployment rate “remains elevated.” It pointed to improvement in household spending, business investment, and housing, but said government fiscal policy “is retraining economic growth” and predicted that growth “will proceed at a moderate pace and the unemployment rate will gradually decline.”
Financial markets took the Fed news in stride. The yield on 10-year Treasuries rose to 2.3 percent from 2.2 percent. The Standard & Poor’s 500-stock index fell less than 1 percent, to about 1,640, from about 1,651. Steve Blitz, chief economist of ITG Economic Research, said the Fed’s statement amounted to “one giant leap towards tapering, one small step towards tightening.”
Bernanke suffered two dissents, on opposite sides of the argument. As expected, hawkish Kansas City Fed President Esther George dissented for a fourth straight meeting, fearing that the Fed policy “could cause an increase in long-term inflation expectations.” Of greater interesting, St. Louis Fed President James Bullard issued a dissent that seemed to indicate that the Fed should do more, not less. He said the Fed “should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.” Normally when the Fed defends its inflation goal, it’s trying to cool off high inflation. But with inflation running below the Fed’s 2-percent target, reaching the goal would mean raising the inflation rate.