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Fed Chief Sends Mixed Signals on Next Moves

There's disagreement among members of the board about what evidence would demonstrate that the economy is on a path of strong and sustainable growth.

by
Rodrigo Sermeño

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June 3, 2013 - 12:02 am
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WASHINGTON – Fed Chairman Ben Bernanke cautioned Congress last week that the Fed will not allow interest rates to rise closer to historical levels because of the risks of moving too aggressively or prematurely.

The Fed chief, however, also said the Fed could take a step down in its pace of bond purchases in the next few meetings, making the stock market react wildly to the conflicting signals sent by the Fed and Bernanke himself in recent weeks.

Bernanke told Congress the first step in the Fed’s exit strategy would be to wind down the quantitative easing program. As part of this program, the Fed has been buying $85 billion a month in Treasury and mortgage bonds since September. This has lowered long-term interest rates and encouraged more borrowing and spending in the U.S. economy.

“As the economic outlook and particularly the outlook for the labor market improves in a real and sustainable way, the committee will gradually reduce the flow of purchases,” said Bernanke.

He also reiterated that any change in the flow of bond purchases would depend on the incoming data and the Fed’s assessment of the labor market and inflation. As Bernanke hastened to note during his testimony to the Joint Economic Committee last week, the Fed does not want to move prematurely because of the danger of ending the economic recovery.

As the Fed approaches the time when it will begin withdrawing its accommodative policies, the central bank must also decide how quickly to wean the economy from the bond purchases. If the Fed acts too quickly to restore normality in monetary policy, it risks halting the economic recovery. If it acts too slowly, risks of inflation may increase along with the probability of destabilizing asset bubbles. This makes a good communications strategy key to maintain credibility with the private sector and bond markets.

“This is not easy and requires good communication,” said Bernanke, when asked about the possible market turmoil the central bank could cause when it starts selling its portfolio. “We are currently discussing further our exit strategy, and we hope to provide more information going forward. But we certainly are confident that we can exit over time in a way that will be consistent with our policy objectives.”

Communications are very important for the central bank because they can shape expectations about the course of inflation and borrowing costs, and thereby influence actions by households, businesses, and investors. Unlike his predecessor Alan Greenspan, who deliberately delivered wordy and vague statements to prevent financial markets from overreacting to his remarks, Bernanke has made an effort to bring a new level of transparency to Fed communications.

Nevertheless, the straightforward message has been blurred by a number of other signals sent by Bernanke and by the Fed in recent weeks. Minutes of the Federal Open Market Committee’s last meeting showed disagreement among members of the board about what evidence would demonstrate that the economy is on a path of strong and sustainable growth. The minutes also indicated that a number of participants expressed their willingness to adjust the flow of purchases downward as early as the next meeting, if the economic data received at that time showed evidence of improvement in the economy. The Fed will meet on June 18-19 to decide its course of action.

Sen. Pat Toomey (R-Pa.), who commended Bernanke for his efforts at greater transparency, expressed his concern over the unpredictable ways in which the Fed’s “extremely accommodative policy” may manifest itself.

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All Comments   (16)
All Comments   (16)
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These guys are all just playing with themselves. How is all this folderol going to bring six million off-shored jobs, and 55,000 exported factories, back to this country?
1 year ago
1 year ago Link To Comment
bernanke : just doing what he's been told , "kill the dollar"
1 year ago
1 year ago Link To Comment
The latest speech he gave nails him to the O/Marxist swing O takes at all times. These so called Modern Liberals are actually pushing the Marxist take on redistribution. The speech was disgusting and very telling.
1 year ago
1 year ago Link To Comment
Like Greenspan did before him Bernanke has continued the rape and pillage of American's bank accounts. A paltry .50% or so on your bank account is nothing but rape - the real inflation rate eats that up - and more. And Americans sit on their collective ass and let these big banks siphon off their hard earned money. When you point that out to these robber barons they tell you to stick your money into the stock market - something that is fast becoming another bubble.

Somethings got to give - and when it does it won't be pleasant. I get images in my mind of Mussolini at his last public appearance - dangling...
1 year ago
1 year ago Link To Comment
Until the 'people' wake up and "force" 1) the deconsoldation of banking and banking services and 2) return banking back to local servicing of ONLY bank accounts and making local loans, the banking industry is going to remain politicized and corrupted. Banks do not belong in the financial investment business! Theres plenty of big specialty financial corporations around to work with the local banks -- say commercial and residential development/services like Sabal Financial, etc. The five major banks essentially control banking and banking services the way it is set up. It is they and the big investment banks that led us to the 2008 economic collapse. It has to change but Wall Street will scream and essentially change is going to happen unless the people make it happen. But like Jaycen says below, all people want to know is where can I deposit my check and withdraw my funds.
1 year ago
1 year ago Link To Comment
Most Americans have no clue what the Central Bank is, what Fractional Reserve is, how basic economics works. If you try to explain it, they switch off and stop paying attention, because "if it wasn't working properly, how can I deposit my paycheck and withdraw my funds?"

It's the same mentality that causes people to say things like, "I only pay attention to politics when it affects me directly."

You know, as if all politics don't affect all of us directly all the time...
1 year ago
1 year ago Link To Comment
Reducing the rate of the money presses is going to be like weaning an addict from heroin. I'm not sure at all that it is possible without making the addict very, very sick. Bernanke & Co. have kept the lid on the pressure cooker so far, but sooner or later I expect it to blow in an unpleasant way.
1 year ago
1 year ago Link To Comment
Except, it won't make the rest of us sick, only those who benefit from it. The Crony Capitalists (who arguably aren't even Capitalists) and the Bureaucratic Class.

Keynesians act as if the "economy will shut down". It won't. People will still buy and sell things. It will fluctuate a bit until prices correct themselves, but it won't shut down.

I think the biggest problem right now is the artificial interest rates. That's got everything so out of whack no one can see straight.
1 year ago
1 year ago Link To Comment
"I think the biggest problem right now is the artificial interest rates. That's got everything so out of whack no one can see straight."

That and the continuing inflation of goods and services. As a side note, it looks as if nobody globally is finding any sustainable growth and reports (domestic) just now breaking show an indication of another downturn looming. This global collapse is unchartered water and I don't think anybody has any viable, sustainable solutions.
1 year ago
1 year ago Link To Comment
What still has me worried, is that when one considers that with all of the QE, liquidity injections, and sustained record low interest rates, the economy should be hitting on a 8 cylinders. We should be in the midst of a classic Keynesian asset bubble with both stock prices and wages soaring. Two point five percent GDP growth may seem impressive to some. But it isn't when our monetary base has grown by trillions in recent years. Stock prices are up, and corporate profits are healthy. But only 63% of adults are employed - many are working 2 minimum wage jobs. Demand for energy, consumer goods, and commodities are well below the 2006-07 levels.


My thinking is that besides QE, our economy is now so closely tied to federal spending (and borrowing), that it is no better than a crack addict. And what happens when the Fed does increase interest rates even just 50 basis points? Can it really survive such a shock?
1 year ago
1 year ago Link To Comment
"...our economy is now so closely tied to federal spending (and borrowing).....

You got it! If folks would learn to look at consumption to GDP and then adjust for the federal, state and local governments consumption they would become horrfied. The governments have always, since post WWII, proped up our national GDP through their consumption.
1 year ago
1 year ago Link To Comment
Is everyone here aware that Obama appointed six of the seven current Board governors?
1 year ago
1 year ago Link To Comment
I don't think it really matters as nobody seems to have an viable sustainable solutions to fixing the global-domestic economies.
1 year ago
1 year ago Link To Comment
They're not quite done raping the peasants yet.
1 year ago
1 year ago Link To Comment
Bernanke is a stuffed shirt short & simple. He doesn't have a clue. Holding down interest rates has killed of any idea of saving retirement. Any guy walking down the street would know much more about common sense econ than ben. Besides, I have no doubt that the fed manipulates the stock market & that Bernanke lost his calling as a garbage man in East LA...
1 year ago
1 year ago Link To Comment
"There's disagreement among members of the board about what evidence would demonstrate that the economy is on a path of strong and sustainable growth."

There is no such evidence. They are going to have to fabricate some more.
1 year ago
1 year ago Link To Comment
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