What are the Feds doing now? Long read but worth it- Get a cup of coffee (Updates stocks, Treasuries in sixth paragraph.) > > By Joshua Zumbrun, Craig Torres and Steve Matthews > July 11 (Bloomberg) -- Federal Reserve Chairman Ben S. > Bernanke called for maintaining accommodation even as the minutes of > policy makers’ June meeting showed them debating whether to stop bond > buying by the Fed in 2013. > “Highly accommodative monetary policy for the foreseeable future > is what’s needed in the U.S. economy,” Bernanke said yesterday in > response to a question after a speech in Cambridge, Massachusetts. > The Fed chairman spoke just three hours after the central bank > released minutes of the June 18-19 gathering showing that about half > of the 19 participants in the Federal Open Market Committee wanted to > halt $85 billion in monthly bond purchases by year end. At the same > time, the minutes showed many Fed officials wanted to see more signs > employment is improving before backing a trim to bond purchases known > as quantitative easing. > The debate underscores Bernanke’s challenge in affirming that, > even after starting to reduce monthly bond buying, policy makers plan > to maintain unprecedented stimulus with a record- high balance sheet > and near-zero target interest rate. > “It is clear they want to pull the trigger on the wind- down of > QE, but they also want to calm market anxieties about raising rates > for the foreseeable future,” said Ward McCarthy, chief financial > economist at Jefferies Group LLC in New York and a former Richmond Fed > economist. Their attempts at providing clarity are further complicated > because of “pretty significant divisions among policy makers on a > number of issues.” > > Stocks Rise > > European stocks advanced as Bernanke’s comments reassured > investors that the days of loose U.S. monetary policy aren’t over. The > Stoxx Europe 600 Index increased 0.9 percent as of > 8:10 a.m. in London. Futures on the Standard & Poor’s 500 Index added > 1 percent, while the MSCI Asia Pacific Index climbed 1.9 percent. > Ten-year U.S. Treasuries rose for a fourth day and the yield slipped 4 > basis points to 2.59 percent. > The minutes also said “several members judged that a reduction in > asset purchases would likely soon be warranted.” > Those members said the “cumulative decline in unemployment since the > September meeting and ongoing increases in private payrolls” had > increased their confidence the labor market had improved, according to > the minutes. > “The many FOMC voices seem all over the map, yet they do agree the > labor market improvement looks more sustainable now than it did at the > time of the QE launch,” said Chris Rupkey, the chief financial > economist for Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This > means to us that the program’s days are numbered.” > > Jobs Report > > The FOMC gathered before the Labor Department’s jobs report for > the month of June -- released on July 5 -- exceeded expectations. The > economy added 195,000 jobs last month and the unemployment rate was > unchanged at 7.6 percent. > Bernanke said the central bank is trying to communicate its plans > for two different policy tools. With bond purchases, the Fed is > “trying to achieve a substantial improvement in the outlook for the > labor market in the context of price stability. > We’ve made progress on that but we still have further to go,” > he said. > The Fed wields another policy tool with its benchmark interest > rate, which it reduced to close to zero in December 2008. Officials > have said they won’t consider raising the main interest rate until the > unemployment rate falls to 6.5 percent, as long as long-term inflation > expectations don’t exceed 2.5 percent. > > Bernanke’s Message > > “It may well be sometime after we hit 6.5 percent before rates > reach any significant level,” Bernanke said. “So again, the overall > message is accommodation. There is some prospective, gradual and > possible change in the mix of instruments, but that shouldn’t be > confused with the overall thrust of policy which is highly > accommodative.” > The 59-year-old Fed chief said the FOMC may opt to hold interest > rates near zero even after unemployment reaches 6.5 percent due to the > possibility of low inflation. Also, the jobless rate may understate > the weakness in the labor market, he said. > “What I hear him saying is that even when we slow purchases, the > balance sheet still gets bigger and even if we stop the purchases the > balance sheet doesn’t shrink,” said Michael Gapen, a senior U.S. > economist at Barclays Plc in New York, and a former member of the > Fed’s Division of Monetary Affairs. “They are trying to communicate > that tapering is not a tightening of policy. That is the fine line > they are walking.” > > First Increase > > Any decision by the Fed on the bond purchases influences how > investors view its approach to the federal funds rate, Gapen said. For > example, if the Fed’s outlook toward employment improves, then > investors will probably shift how they view policy makers’ approach to > the main interest rate. > Some 15 policy makers in June expected the first increase in the > benchmark lending rate in 2015 or later. Still, fed funds futures > contracts show about a 54 percent probability that the benchmark > lending rate will be 0.5 percent or higher by December 2014, an > increase from 22 percent two months ago. > Fed policy makers next meet July 30-31 in Washington. They don’t > plan to update their economic forecasts, and Bernanke isn’t scheduled > to hold a press conference until after their Sept. 17-18 meeting. At > that gathering, the FOMC will be able to review jobs reports for July > and August. > “There’s still a clear bias to taper but I think they’ve taken > just a baby step back from the strength of that bias and data will > matter from here,” said Julia Coronado, chief economist for North > America at BNP Paribas SA in New York, and a former Fed economist. > “It’s not just hiring, it’s GDP and inflation that will factor into > the equation,” she said, referring to gross domestic.
Posted on: Thu, 11 Jul 2013 17:06:26 +0000
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