Updated 4:38pm ET May 23, 2013
Hint of Tapering Rattles Markets
Bernanke, FOMC Rattle Markets
Markets saw the first major selling pressure in three weeks following comments from Fed Chairman Ben Bernanke and the FOMC Minutes from the May 1 meeting. Given the extremely accommodative stance the Fed has it was nearly impossible for them to provide a stance that did not appear like it was preparing to taper purchases. But with each mention that 'economic data could lead to the tapering of the current program' the market would sell off on the feared 'tightening'. Given the feeling that QE has boosted the run in equities this is a fair reaction. But with employment continuing to run above the 6.5% target of the Fed and inflation showing few signs of spiking, it would not appear that any major moves by the FOMC is imminent. The following is some of the key comments from both the Fed Chairman testimony and the May 1 FOMC Minutes:
Fed Chairman Ben Bernanke TestimonyEconomy continues 'growth at a moderate pace' commentary. Conditions in the job market have shown some improvement recently. Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Consumer price inflation has been low. Over the nearly four years since the recovery began, the economy has been held back by a number of headwinds. Some of these headwinds have begun to dissipate recently, in part because of the Federal Reserve's highly accommodative monetary policy. Severe fiscal and financial strains in Europe, by weighing on U.S. exports and financial markets, have also restrained U.S. economic growth over the past couple of years. However, since last summer, financial conditions in the euro area have improved somewhat, which should help mitigate the economic slowdown there while also reducing the headwinds faced by the U.S. economy. With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. The first of these alternative tools is "forward guidance" about the FOMC's likely future target for the federal funds rate. Since December, the Committee's postmeeting statement has indicated that its current target range for the federal funds rate, 0 to 1/4 percent, will be appropriate "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes. Accordingly, in considering whether a recalibration of the pace of its purchases is warranted, the Committee will continue to assess the degree of progress made toward its objectives in light of incoming information. In the current economic environment, monetary policy is providing significant benefits. Fed Chairman Comments During Q&A 'There are no signs that would cause us to sell assets at this time'; confident it can exit when necessary; could normalize policies by letting securities simply roll off, sees positives to this approach. Slowness of the economy due to 1) Europe, 2) Housing; 3) Fiscal policy been a significant headwind; 4) Prior financial crisis. says monetary policy has been keeping the economy afloat in the short run. 'I personally believe we could exit without selling any MBS' The Fed has not updated the exit strategy from two years ago which included sales of RMBS. Says a new fiscal policy could take off some of the burden on monetary policy; says new fiscal policy would make it easier for them to unwind.
FOMC MinutesFed Minutes Comments on Potential Tapering -Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee's economic objectives. Accordingly, Ms. George preferred to signal a near-term tapering of asset purchases, which would begin to move policy toward a more appropriate stance. FOMC Comments on Inflation- Both headline and core PCE inflation in the first quarter came in below the Committee's longer-run goal of 2 percent, but these recent lower readings appeared to be due, in part, to temporary factors; other measures of inflation as well as inflation expectations had remained more stable. Accordingly, participants generally continued to expect that inflation would move closer to the 2 percent objective over the medium run. Nonetheless, a number of participants expressed concern that inflation was below the Committee's target and stressed that future price developments bore careful watching. Most of the recent reports from business contacts revealed little upward pressure on prices or wages. A couple of participants expressed the view that an additional monetary policy response might be warranted should inflation fall further. It was also pointed out that, even absent further disinflation, continued low inflation might pose a threat to the economic recovery by, for example, raising debt burdens. One participant focused instead on the upside risks to inflation over the longer term resulting from highly accommodative monetary policy. Other Notable Comments The information reviewed at the April 30--May 1 meeting indicated that economic activity expanded at a moderate pace in the first quarter. Indicators of near-term labor market conditions were consistent with projections of moderate increases in employment in the coming months. Financial conditions improved a little, on balance, over the intermeeting period. In the economic forecast prepared by the staff for the April 30--May 1 FOMC meeting, the projection for real GDP growth was little revised from that prepared for the March meeting. With fiscal policy expected to be tighter this year than last year, the staff still anticipated that the pace of expansion in real GDP would only somewhat exceed the growth rate of potential output in 2013. The staff also continued to project that real GDP would accelerate gradually in 2014 and 2015, supported by an eventual easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and the unemployment rate was expected to decline gradually. The staff's forecast for inflation was also little revised from the projection prepared for the March FOMC meeting. Participants generally saw the economic outlook as little changed since they met in March. However, economic data releases over the intermeeting period were mixed, raising some concern that the recovery might be slowing after a solid start earlier this year, thereby repeating the pattern observed in recent years. A number of participants noted that the balance of risks to growth remained to the downside, although a couple suggested that such risks had diminished appreciably since last fall. A few participants warned that, in light of ongoing fiscal restraint and a weak global outlook, economic data could remain soft for the next few months, regardless of the underlying strength of the economy.
Economic Projections from last meeting
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