June 19, 2013 / 6:01 PM / 6 years ago

WRAPUP 6-Bernanke says Fed likely to reduce bond buying this year

* Fed says risks to growth, jobs have lessened since fall
    * Bernanke says Fed could end bond buying by mid-2014
    * Two officials dissent; Bullard worries inflation too low

    By Alister Bull and Pedro da Costa
    WASHINGTON, June 19 (Reuters) - Federal Reserve Chairman Ben
Bernanke said on Wednesday the U.S. economy is expanding
strongly enough for the central bank to begin slowing the pace
of its bond-buying stimulus later this year.
    Bernanke's confirmation that the Fed is getting closer to
pulling back on its $85 billion in monthly asset purchases
confirmed investor fears, sending stocks and bonds sharply lower
and pushing benchmark Treasury yields to a 15-month high.
    Moderate growth should lead to a further healing in the job
market as headwinds facing the economy ease, Bernanke said. He
also said policymakers expect inflation to move back up toward
their long-term 2 percent goal.
    The Fed's willingness to dial back on the amount of stimulus
it is pumping into the economy reflects growing confidence in
the sustainability and strength of the recovery. Since cutting
interest rates to near zero in late 2008, the central bank has
more than tripled its balance sheet to about $3.3 trillion to
drive borrowing costs down and spur hiring. 
    "The committee currently anticipates that it will be
appropriate to moderate the monthly pace of purchases later this
year, and if the subsequent data remain broadly aligned with our
current expectations for the economy, we will continue to reduce
the pace of purchases in measured steps through the first half
of next year, ending purchases around mid-year," Bernanke said.
    He added that the jobless rate should have declined to near
7 percent from its current rate of 7.6 percent by the time bond
purchases are halted. If its forecasts proved too optimistic,
the Fed could stop reducing its bond purchases or even raise
them again, Bernanke said.
    The Standard & Poor's 500 stock index closed down
nearly 1.4 percent, while yields on the 10-year U.S. Treasury
note hit 2.36 percent, the highest level since March 2012, as
traders recalibrated bets to account for a more hawkish Fed. The
dollar also strengthened.
    In a change of policy, Bernanke also said a majority of Fed
policymakers believe the central bank should hang onto the
mortgage assets it acquired through its unconventional monetary
stimulus when it decides to tighten monetary policy.
    He made the statements at a news conference on the Fed's
decision to continue buying $40 billion in mortgage-backed
securities and $45 billion in longer-term U.S. government
securities each month.
    After a two-day meeting, the Fed's policy-setting panel
offered a more upbeat assessment of the risks facing the economy
than it have given after the last meeting in May. "The committee
sees the downside risks to the outlook for the economy and the
labor market as having diminished since the fall," it said.
    A Reuters poll of 17 top Wall Street bond dealers found that
16 expect a reduction in the Fed's asset purchases by year-end,
with a plurality pegging the central bank's September meeting as
the starting point. These dealers saw the Fed slowing its bond
purchases by $10 billion to $28 billion on that first pass, with
a median response of $20 billion. 
    Bernanke stressed that a slower pace of bond buying would
still be adding support to the economy, and that any decision to
begin removing stimulus remained a long ways off. Any eventual
increases in interest rates would also be gradual, he added.  
    "They do indeed plan to taper purchases later this year and
hope to be done by next summer. Bernanke wants to communicate
that this is not necessarily tightening, but the market may not
see it that way," said Axel Merk, president and chief investment
officer of Merk Investments in Palo Alto, California. 
    Esther George, the president of the Kansas City Fed, again
dissented against the Fed's expansion of its support for the
economy, expressing concern it could fuel financial imbalances
and hurt the central bank's goal of keeping inflation contained.
She has dissented at every policy meeting since January.
    But in a surprise, the St. Louis Fed chief, James Bullard,
also dissented, though in the opposite direction, arguing the
Fed should have signaled more strongly its willingness to keep
its stimulus in place to defend its 2 percent goal for
    In its statement, the Fed repeated that it would not raise
rates until unemployment hits 6.5 percent or lower, provided
that the outlook for inflation stays under 2.5 percent.
    Bernanke made clear that threshold was merely for
considering a rate hike, not a trigger for necessarily making
one. In fresh quarterly projections, 14 of the 19 members of the
Fed's policy panel said they did not think it would be
appropriate to raise rates until some time in 2015. 
    In a sharp downgrade, the Fed forecast the PCE price index,
its preferred gauge of the price pressures facing consumers,
would rise just 0.8 to 1.2 percent this year. However, it saw
inflation heading back to 1.4 to 2.0 percent in 2014 and 1.6 to
2.0 percent in 2015.
    A low inflation rate could allow the Fed to keep interest
rates lower for longer and could even force additional monetary
easing if low inflation persists or inflation falls further.
    In a slight upgrade to their economic projections, officials
forecast unemployment to average 6.5 to 6.8 percent in the
fourth quarter of next year, and 5.8 to 6.2 percent in the final
three months of 2015. 
    They forecast U.S. economic growth of between 3.0 and 3.5
percent next year and 2.9 to 3.6 percent in 2015.
    Analysts think U.S growth slowed a bit in the second quarter
of this year in the face of fiscal drag from government spending
cuts and higher taxes; recent readings from the economy have
been mixed.
    The labor market, a central focus of Fed efforts to boost
growth, has notched steady improvement with 175,000 new jobs
added in May. But U.S. manufacturers have been hurt by softer
overseas demand, and inflation has fallen even further beneath
the Fed's goal.
    The consumer price index was up 1.4 percent in May from a
year ago. But the PCE price index rose just 0.7 percent in the
12 months through April, the most recent reading.
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