The market’s reaction to Ben Bernanke is starting to resemble the scene from Monty Python and the Holy Grail, where two guards cannot understand the simple command from the King of Swamp Castle: “Make sure the prince doesn’t leave this room until I come and get him.” (Guard: “Not to leave the room, even if you come and get him.”)
For some time, the chairman of the Federal Reserve has been making it as clear as possible that: a) the Fed won’t raise rates any time soon, and b) there is no strict timeline for tapering its bond-buying program, known as quantitative easing or QE. Mr. Bernanke again tried to inform the markets of this plan, in testimony before Congress on Wednesday – and the message seems to be getting through at last.
He said that asset purchases “are by no means on a preset course.” From Bloomberg News: “The current pace of purchases could be maintained for longer” if inflation remained too low, the outlook for employment became less favorable or “financial conditions – which have tightened recently – were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” he said.
If this sounds like non-news, consider that U.S. Treasury bonds are rallying – sending the yield on the 10-year U.S. Treasury bond below 2.5 per cent – major equity indexes are rising and homebuilding stocks, in particular, are up even after housing starts and building permits in June took a big step down. In other words, it’s news to the market.
“The message that the tapering of QE3 is not set in stone and that the end of the asset purchases won’t be immediately followed by higher interest rates is increasingly getting through to the markets,” said Paul Dales, senior U.S. economist at Capital Economics, in a note.
No wonder: He has been saying more-or-less the same thing since the press conference following the release of the last monetary policy statement, in mid-June. Back then, he said: “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year.” Somehow, the market took this to mean that the Fed could raise interest rates as early as 2014 – an interpretation Mr. Bernanke has been trying to stamp out ever since.
Here are a few comments from economists on Wednesday’s Congressional testimony.
Ian Shepherdson, Pantheon Macroeconomics: “Mr. Bernanke’s testimony offers no big surprises but has a lot to say about risks to the Fed’s core view: Higher mortgage rates could slow housing, inflation could fall too far, fiscal policy could be a bigger drag than expected, and slow global growth could hold back the US too. The point of this litany of possible woes, we think, is to emphasize to markets that the Fed is much more willing than investors thought, after the June 19 press conference, to contemplate delaying the tapering if the data are not as strong as they hoped.”
Dawn Desjardins, Royal Bank of Canada: “On balance, while this testimony provides more nuanced action plan, it is broadly in line with the Fed’s June 19 statement and in line with our view that the Fed will reduce the amount of monthly bond purchases likely starting in the fall of this year. We anticipate a fairly linear pace of tapering to occur setting up for the program to end by mid-year 2014 with no move in the ‘exceptionally low range’ of 0.00 per cent to 0.25 per cent until 2015.”
Paul Dales, Capital Economics: “In short, Bernanke has told the markets in no uncertain terms that the Fed’s so-called ‘reaction function’ has changed and that policy won’t be tightened even when the economy warrants it. This is the strongest and clearest form of forward guidance of all the major central banks. And by repeating all this in such a high-profile public setting does appear to be paying dividends.”