Ben Bernanke’s press conference on Wednesday afternoon managed to do what the Federal Reserve’s earlier monetary policy statement did not: Worry financial markets that the end is nigh for stimulus.
In afternoon trading, the S& 500 was down 15 points or 0.9 per cent. Perhaps more alarming, the yield on the 10-year U.S. Treasury bond jumped to 2.32 per cent, up 13.2 basis points, to its highest level in more than a year.
As we noted earlier, the Fed’s policy statement stuck more or less to the tone of the previous statements – saying that the central bank will continue to buy Treasury bonds and mortgage-backed securities at a pace of $85-billion (U.S.) a month, more if conditions deteriorate.
Yet, the Fed chairman’s press conference following the statement’s release was something entirely different, and that’s what seemed to rattle markets.
Mr. Bernanke said that bond purchases would likely moderate later this year and end mid-2014 – “if the incoming data are broadly consistent” with its economic forecasts – with a 7 per cent unemployment rate acting as a threshold for Fed policy.
He stressed that the policy was flexible: If the economy continues to improve, bond purchases will slow; but if the economy stalls, its policy of quantitative easing will continue to provide economic stimulus.
It’s an outlook that appears to give markets everything they want – that is, either an improving economic backdrop or additional assistance – yet markets have taken the policy shift rather badly so far.