Environment: Monetary Policy and Fed Essay

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Capital Column: A Hawkish Signal Bernanke Didn't Send - WSJ.com

6/26/13 9:48 AM

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CAPITAL

June 25, 2013, 7:19 p.m. ET
By

A Hawkish Signal Bernanke Didn't WESSEL Send DAVID
The markets have misread Ben Bernanke. The Federal Reserve chairman's news conference a week ago was widely seen as a signal that the Fed is preparing to wean the economy off easy money, perhaps sooner than many anticipated. Global stock markets plunged. The bond market pushed yields on 10-year U.S. Treasury notes close to 2.6%, higher than they've been since August 2011. Rates on 30-year fixed-rate mortgages leapt, hitting 4.6% this week, up from 4.1% the week before, according to HSH Associates. Futures markets are betting the Fed might lift short-term rates from zero as soon as mid-2014. That is neither what Mr. Bernanke expected nor what he meant. "There is no change in policy here," he said at the news conference. Mr. Bernanke said that if the economy unfolds as the Fed expects—and he emphasized the "if"—it would reduce later this year the size of its purchases of Treasury and mortgage-backed bonds, currently at $85 billion a month. He said the plan is to cease the bond purchases, known as "quantitative easing," in mid-2014 if "subsequent data remain broadly aligned with our current expectations" that unemployment will fall to about 7%.
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The Federal Reserve chairman's news conference a week ago was widely seen as a signal that the Fed is preparing to wean the economy off easy money. Not so, Capital columnist David Wessel argues. Photo: AP.

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Capital Column: A Hawkish Signal Bernanke Didn't Send - WSJ.com

6/26/13 9:48 AM

Central Banks Say No Swift End to Easy Money Earlier Analysis: Markets Might Be Misreading Fed's Messages 6/21/13

He repeated the vow to keep short-term interest rates near zero "at least" until unemployment falls to 6.5%, probably not before 2015.

Surveys of dealers and analysts taken before the Fed's policy suggested this was what they expected. A close reading of Mr. Bernanke's remarks shows him reminding listeners that this schedule depends on how well the economy does. "And that," he said, "should provide some comfort to markets because they will understand, I hope, that….[i]f the economy does not improve along the lines that we expect, we'll provide additional support." So what moved the markets? One possibility is that markets—and analysts who interpret them—misunderstood Mr. Bernanke. Goldman Sachs economists called the news conference "a hawkish surprise." Mr. Bernanke vowed to "evaluate economic conditions and risks as they evolve." Markets focused on his declaration that "downside risks to the outlook and the labor market have diminished."

The Federal Reserve chairman's news conference a week ago was widely seen as a signal that the Fed is preparing to wean the economy off easy money. Not so, Capital columnist David Wessel argues. Photo: AP.

Mr. Bernanke reiterated the Fed's goal to push inflation up toward the Fed's 2% target. Markets focused on his claim that recent inflation readings are low partly because of "transitory factors" and his dismissal of falling inflation expectations in bond markets. Mr. Bernanke said the Fed no longer anticipates selling any of its mortgage-backed securities and will hold them until mortgages are paid off. Markets focused on the talk of buying fewer bonds.
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