No ‘taper’ to central bank’s support of US economy. Fed requires ‘more evidence that progress will be sustained’. Markets cheer the announcement while the US dollar falls. The Fed’s decision underlines the fragility of US recovery…
We’re going to wrap up our live blog coverage. Here’s a summary of where things stand:
• The Federal Reserve announced no change to its program of monthly asset purchases designed to stimulate the economy. The central bank will continue to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. ”The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the central bank said in a statement.
• The news sent markets through the ceiling. The Dow Jones Industrial Average, which had been concerned that the central bank would take the economy off life support, hit an all-time high on the announcement.
• However the decision to maintain the stimulus pointed to a diagnosis on the part of the Fed of sustained, underlying economic weakness. In June, Fed chairman Ben Bernanke said the central bank may begin tapering its asset purchases. There was no sign of such talk today, three months later.
• Bernanke said that unemployment was lower but not low enough (the Fed has set a 6.5% benchmark) and growth is up but not far enough. Bernanke said the current unemployment rate of 7.3% “understates the amount of true unemployment in the economy” because of the job markets cycle and demographic trends.
• The news floored analysts and reporters, who reminded Bernanke that as recently as June he was talking about “tapering” quantitative easing. “I don’t recall stating that we would do any particular thing in this meeting,” he replied.
• Bernanke said the economy continued to show signs of recovery, and sectors closest to the QE program – housing and autos – showed some of the best improvement. “There has been a lot of progress,” he said. “Labor market indicators are much better today than they were when we began… more than a year ago.”
• Bernanke warned of the potential “very serious consequences for financial markets and the economy” if the country defaults on debt or if the federal government has to shut down due to a congressional failure to reach a budget deal.
• Bernanke dismissed the idea that quantitative easing is turning, against the central bank’s will, into a very long-term policy. He said easing would last until there’s “substantial improvement” in the outlook of the labor market. At the moment there’s some improvement, he said, but “ultimately we will reach that level of substantial improvement.”
Bernanke is done. The news conference has ended. For the time being, he’s not going anywhere.
Pushing back against the impression that Fed policy helps the affluent most, Bernanke says the Fed is working to help the middle class by seeking to strengthen the jobs market and ensuring price stability.
He acknowledges that the rich are getting richer and the poor are getting poorer. Then he says the Fed can’t do much about that:
Our economy is becoming more unequal. The very rich people and the people in the lower half who are not doing well.
This has been going on for decades…. It’s important to address these trends, but the Federal Reserve doesn’t really have the tools to address these long-run… trends.
Bernanke says there are signs quantitative easing is working:
It’s difficult to get a precise measure. There’s a large academic literature.. . my own assessment is that it has been effective… some of the leading sectors like housing and autos” are tied most directly to asset purchases.
There has been a lot of progress. Labor market indicators are much better today than they were when we began… more than a year ago.
Bernanke addresses the question raised by my colleague Dominic Rushe earlier. If the economy continuously fails to meet the benchmarks the Fed has laid out for ending asset purchases, how will it ever get out of QE?”
“The criterion for ending purchases is a substantial improvement in the outlook for the labor market,” Bernanke says. He says there has been some improvement and “ultimately we will reach that level of substantial improvement.”
Then easing can end.
A potential failure next month in Congress to raise the debt limit or pass a budget is “obviously part of a very complicated set of legislative decisions, strategies, battles” that Bernanke won’t comment on.
But he says “a government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy.”
Bernanke says the central bank tries to take into account such potential threats, but the Fed is relatively powerless in this field.
Is the Fed concerned about confusing investors by mentioning tapering and then not doing it?
I don’t recall stating that we would do any particular thing in this meeting. What we are going to do is the right thing for the economy, Bernanke says… We try our best to communicate.. We can’t let market expectations dictate our policy actions.
The markets really like it.
0-2: At the start of the blog we speculated that Bernanke might simultaneously announce that he’s winding down QE and winding down his career as Fed chairman. In fact he has done neither.
Bernanke is asked whether he’s leaving:
“I prefer not to talk about my plans at this point.”
Could tapering begin by the end of 2013? Bernanke says there’s no fixed schedule:
There really is no fixed calendar… If the data confirm our basic outlook… then we could move later this year. But even if we do that, the subsequent steps will [rely] on continued progress in the economy.
The criteria include an improved labor market including lower unemployment.
Bernanke is asked whether he was speaking out of turn in June, when he said the fed could start tapering its stimulus program. Was it a mistake to talk about tapering back in June?
I think there’s no alternative … but to communicate as clearly as possible. As of June we had made meaningful progress in terms of labor [market],” Bernanke says. He says green shoots in the jobs market convinced the committee that it was the time to start talking tapering.
The question: what changed, to make the talk stop?
Bernanke says low job market participation is partly cyclical:
“There’s a cyclical proponent to participation. The unemployment rate understates the amount of true unemployment in the economy.”
“There’s also a downward trend in participation in our economy,” Bernanke says, but he pins the trend on external factors including an aging population.
The focus of course is on the Fed’s decision to leave its asset purchase program unchanged but a relevant question is “why.” “It seems as though there are two major reasons for the decision,“ Guardian business correspondent Dominic Rushe (@dominicru) writes:
1. The rise in mortgage rates is contributing to a tightening of financial conditions, which the Fed is obviously worried about.
2. The Fed inserted a new sentence that begins with “taking into account the extent of federal fiscal retrenchment.” The Fed has long been worried about their fiscal brethren and that worry crept further into today’s statement.
Even though the Fed acknowledges that things have picked up since they began QE3 late last year, they “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
This is not what we expected. However it is, from the Fed’s point of view, understandable.
But there’s a rather unsettling conclusion to Dominic’s analysis:
However, if the tightening of financial conditions, which was partially a result of the Fed’s decision to discuss slowing asset purchases, is enough to forestall an actual reduction, then in theory the Fed can never cease purchasing assets unless there is no adverse reaction in asset markets. It becomes a negative cycle in which the Fed would find itself trapped.
Guardian finance and economics editor Heidi Moore (@moorehn) is performing Bernanke-to-English tranlsation:
Bernanke says there are signs the economy is improving.
He says that unemployment is falling [Editor: if only by 1.8% over the last two years]; 2.3m private sector jobs have been created; aggregate hours of work are up; and weekly unemployment claims are falling. ”
All this “despite substantial fiscal headwinds,” Bernanke says.
Bernanke is discussing the FOMC projections for interest rates, unemployment and inflation.
He says the collective projections of the committee members have rates moving from 2.0-2.3% in 2012 to 2.5-3.3% in 2016.
Unemployment is expected to move from 7.1-7.3% in 2013 to 5.4-5.9% by 2016, “about the long-run normal level.”
Inflation is projected to move from 1.1-1.2% in 2013 to 1.7-2.0% in 2016.
Bernanke is speaking. Watch live on CSPAN here.
Anything to instill confidence?
If the Fed keeps buying long-term government debt – and the board of governors just announced that that will continue to the tune of $45bn per month – return to investors on that debt will not be as strong. Also see this chart:
Bloomberg columnist Caroline Baum posed this question for Bernanke in the event that the Fed decided to maintain its stimulus program, which it now has: Why?
Various Fed studies suggest that the third round of asset purchases has had a negligible effect on long-term interest rates, that the real benefit comes from forward guidance. Why, then, have you decided to stick with the program? Ten-year yields are up 120 basis points since May. Any bang for the buck seems to have dissipated.
Read Baum’s Ten Burning Questions for Ben Bernanke here.
Fed chair Ben Bernanke is scheduled to meet the press in about 10 minutes. He’s likely to face sharp questions about why the Fed has decided to stick with a policy, quantitative easing, that seems to have born little fruit over three rounds and almost five year.
Guardian finance and economics editor Heidi Moore (@moorehn) sees the move as a symptom of how dire the economic situation is. Easing isn’t working – but there isn’t a plan B.
Try, try again. And again. And
What just happened? You can read the full Fed board of governors statement on the decision that has emerged from the two-day meeting of the open markets committee here.
In short the central bankers did not judge the economy to have hit benchmarks that would have dictated a change in stimulus policy – in this case slowing the purchase of mortgage-backed securities, Treasury bills and bank debt.
At a deeper level, the Fed self-evidently retains belief in these levers to move the economy. The tools still work, this decision says, and the Fed intends to keep applying them.
Here’s the key graph from the Fed statement, with this key sentence: ”the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
Read the full Fed statement here.
The markets like it.
Guardian business correspondent Dominic Rushe has some early details of the Fed announcement that it has no immediate plans to phase out or “taper” its $85bn-monthly asset purchase program.
The Fed says it is waiting for “more evidence that progress will be sustained before adjusting,” Dominic reports.
No taper. More to come.
All the major US stock markets are trading slightly lower ahead of Fed announcement, GuardianUS business correspondent Dominic Rushe (@dominicru) reports:
The S&P 500 is down 0.11% and the Dow 0.26%. Blame nerves. As until the announcement comes this afternoon, no one outside the Fed really knows whether Bernanke is going to start the “tapering” the $85bn a month quantitative easing stimulus programme or not.
That shoe took a long time to drop. President Obama is prepared to name Federal Reserve vice chairman Janet Yellen as the next chairwoman of the Federal Reserve, the Washington Post reports, citing a White House official and “people close to the White House”:
Federal Reserve Vice Chairman Janet Yellen is the leading candidate to be President Obama’s nominee to lead the Fed as chairman, a White House official said Wednesday. Barring any unexpected development, that likely means that Yellen will get the nomination, perhaps as soon as next week.
People close to the White House said this week that Yellen was the front-runner after the unexpected withdrawal by former White House economic adviser Lawrence Summers, who was facing sharp resistance on Capitol Hill.
Full piece here. Summers’ withdrawal did not leave Yellen the lone horse in the race, however. Wonkblog’s Neil Irwin today handicapped a competition between Yellen and Donald L. Kohn, her predecessor as Fed vice chairman. Irwin concluded it could go either way on the merits, but Yellen may be the more politically expedient choice:
The president has a choice between two very qualified, experienced central bankers for the job, with the differences between them more subtle variations in style and temperament than any vast chasm in monetary policy views. Against that backdrop, if he passes over Yellen, who would be the first woman in the job and has been endorsed by Wall Street economists and many in Congress, he’ll face tough questions on why.
Read the full piece here.
“After three years of money-pumping, quantitative easing is evidently doing nothing to bring the country to full employment, which is one of the two tasks the Fed exists to perform,” Guardian finance and economics editor Heidi Moore (@moorehn) wrote at the start of this month. That’s one reason “it’s worth examining whether QE has outlived its usefulness”:
The hard news is this: it’s a smart idea for the Fed to taper, to start opening the door for the end of stimulus. It’s not a smart idea because the economy is healthy – it isn’t – but because the economy needs to come off life-support and breathe for itself.
Quantitative easing is a drug that seems to be long past its due date. After three years, the returns are in: there are likely no more benefits coming to the economy from holding down interest rates and buying up mortgage bonds.
The economy isn’t recovering, Heidi writes; it’s “in some kind of unresponsive fugue state that we’ve arbitrarily chosen to call a ‘recovery.‘” Read the full analysis here.
Good midday and welcome to our live blog coverage of Ben Bernanke’s eagerly awaited remarks on two topics he uniquely owns: quantitative easing and Ben Bernanke. There’s a chance the Fed chair will use his press conference this afternoon to show them both the Out door.
There’s money on the line. Markets will be listening for signals that the Federal Reserve bank plans to wind down its $85bn in monthly asset purchases known as quantitative easing. For nearly five years the stimulus program has helped markets find confidence in a discouraging landscape. Bernanke has signaled that it won’t last forever. But it was supposed to last until the economy – and specifically the unemployment rate – improved. Or until rising interest rates grew too worrisome.
Neither has happened. The landscape remains discouraging, with unemployment at 7.3% and job market participation at an all-time low. Inflation has yet to rise to the 2% target Bernanke has proposed (he calls it the “objective” rate).
Clearly, easing isn’t working. Unless it is, and the numbers would be even more terrible without it. For two days the fed’s open markets committee (FOMC) has been discussing this and other questions. This afternoon Bernanke is expected to indicate what the group decided.
Additionally Bernanke may talk about his own plans to step down as Fed chair, a seat he’s occupied since President George W Bush appointed him in 2006. The conclusion that Bernanke will leave when his current term expires at the end of January is so foregone that the secret struggle to replace him already has produced public losers.
guardian.co.uk © Guardian News & Media Limited 2010