Jon Hilsenrath of the Wall Street Journal has produced an analysis piece on Friday afternoon arguing that markets might be misreading the Fed’s messages.
Before you shrug, keep in mind that Mr. Hilsenrath is known for being the most plugged-in reporter at the Federal Reserve, so you have to wonder if a – cough! – well-placed source is driving his thesis. Then again, his evidence is a matter of public record.
His six points:
1. While the Fed said on Wednesday that it would likely slow its bond-buying, known as quantitative easing or QE, it also said it would be a long time before it raised its key interest rate.
2. The Fed said it could keep its key rate at ultra-low levels for longer than previously planned, so all this talk about a 2015 rate hike is conjecture. Mr. Bernanke also added that rates could stay low even if the unemployment rate falls below 6.5 per cent, previously seen as a threshold for rate hikes.
3. Fed officials are acting more dovish. Previously, five officials saw rate hikes before 2015. Now, the number has fallen to four.
4. Most Fed officials believe the central bank should never sell its portfolio of mortgage-backed securities, and instead let the portfolio shrink as mortgages are paid off.
5. St. Louis Fed president James Bullard has shifted to a dove from a hawk, now arguing that the Fed policies should favour more stimulus.
6. Mr. Bernanke has stressed that the withdrawal of stimulus is tied to the economy: “If you draw the conclusion that I’ve said that our policies, that our purchases, will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy … we have no deterministic or fixed plan.”
The stock markets don’t know which way to go on Friday. After a steep decline on Wednesday and Thursday, U.S. indexes are now alternating between slight gains and slight declines on Friday afternoon. With about two hours left in the trading day, the S&P 500 is down about 3 points or 0.2 per cent.
However, the bond market is more confident. The yield on the 10-year U.S. Treasury bond rose on Friday for the fifth straight day, to about 2.5 per cent. That the highest yield in 22 months and marks a 37 basis-point increase this week alone.