Federal Reserve Chairman Ben Bernanke spent much of an hourlong news conference trying to clarify for Wall Street when and why the Fed might begin shrinking its $85 billion-a-month bond-buying program.
The short answer is soon.
The reason is that the Fed has grown more upbeat about the economy. But Bernanke’s blunt message was not without a string of caveats. The most important is that any pullback in the Fed’s support hinges on the economy strengthening further.
The prospect of fewer Fed purchases of Treasury and mortgage bonds has caused financial markets to shudder because investors expect interest rates will rise.
Those of us who don’t work on Wall Street could be forgiven for still being a little confused.
Here are some key topics Bernanke touched on at the end of the Fed’s two-day policy meeting Wednesday.
Economy looks better
The Fed released a policy statement that said the economy is strengthening and that the risks are diminishing. Bernanke said the economy is benefiting from stronger hiring, a healthier housing market and less financial stress on state and local governments.
Bernanke said it was worth noting that the economy has improved despite spending cuts and tax increases that kicked in earlier this year.
Bernanke justified the Fed’s growing inclination to shrink its bond-buying program later this year — and potentially end it altogether by the middle of 2014 — by noting that it forecasts “substantial” improvement in the economy.
The Fed projects that the economy will grow as much as 2.6 per- cent in 2013 and up to 3.5 percent in 2014. The unemployment rate will fall from 7.6 percent in May to as low as 7.2 percent at the end of this year — and to as low as 6.5 percent in 2014. And it forecasts inflation to remain beneath the Fed’s target of 2 percent.
If those forecasts are right, that would mark “substantial progress,” he said.
Nice as all that sounds, Bernanke made clear that the Fed is just as prepared to maintain its current pace of bond-buying if the better economic trends don’t materialize.
“If you draw the conclusion that I just said that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion,” he said. “Our purchases are tied to what happens in the economy.”
Bernanke likened any reduction in the Fed’s bond purchases to a driver letting up on a gas pedal rather than applying the brakes. The Fed could easily step on the gas again, he said.
And he stressed that even after the Fed ends its bond purchases, it will maintain its $3.4 trillion investment portfolio, which will help keep long-term rates down.
“We will be providing whatever support is necessary,” he said. “If the economy does not improve along the lines that we expect, we’ll provide additional support.”