Fed officials clarify 'tapering'

Markets around the world fell following Ben Bernanke's comments Officials at the Federal Reserve have tried to calm investors by emphasising that bond purchases will not halt until the economy strengthens.


The comments are the strongest signals yet by monetary officials following recent market turmoil.

Markets were rattled after chairman Ben Bernanke indicated last week that the Fed could start scaling back its extraordinary support of the economy.

A survey on Thursday showed a sharp rise in mortgage rates this week.

William Dudley, president of the Federal Reserve Bank of New York, said: "If labour market conditions and the economy's growth momentum were to be less favourable, I would expect that the asset purchases would continue at a higher pace for longer."
'Data over date'
The Fed buys $85bn (£55.8bn) a month in bonds. This is aimed at lowering long-term interest rates, which are used as a benchmark to determine the rates at which households and businesses borrow for long-term investments.

Markets saw a dramatic sell-off over the past week after Mr Bernanke said that the central bank could begin paring its bond purchases by the end of 2013 and wind them down completely by the middle of 2014.

Stock markets around the world plunged, and benchmark 10-year US bond yields jumped.

Investors took fright over concerns that the so-called "tapering" would lead to higher interest rates, which may nip the US economic recovery in the bud.

But Jerome Powell, a member of the Fed's Board of Governors in Washington, said investors appeared to have misinterpreted that the Fed would end its purchases.

"The path of rates will ultimately depend on the path of the economy," said Mr Powell in an appearance on Thursday at the Bipartisan Policy Center, a Washington think tank.

"I want to emphasise the importance of data over date."
'Feral hogs'
Earlier this week Richard Fisher, president of the Dallas Federal Reserve and a member of the Fed's rate-setting committee, blamed the "feral hogs" of financial markets for pushing up the yields on US Treasuries.

"The Fed has made efforts to talk the market back from those assumptions," said Ian Lyngen, senior government bond strategist at CRT Capital Group.

But soothing comments from Fed officials seem to have had little effect.

Mortgage rates on 30-year fixed loans soared to their highest average in two years, reported mortgage buyer Freddie Mac. The rate is now 4.46%, a full percentage point more than a month ago.

Mortgage rates tend to reflect the yield on the 10-year Treasury bill, which recently hit a 22-month high.

According to Bankrate.com, a company that helps consumers compare and calculate mortgages, a buyer who locked in a 3.35% rate in early May on a $200,000 mortgage would pay $881 (£578) a month.

Today, that same mortgage would cost $1,008, more than $100 each month.

Fed officials in damage control mode

Jeremy Stein is the late Fed official to try to calm markets after Chairman Ben Bernanke's comments on stimulus last week.

Jeremy Stein, a Federal Reserve Board Governor, noted Friday that investors may have overreacted, after Fed Chairman Ben Bernanke said the central bank may start slowing its stimulus program later this year.

Initially, stocks fell and bond yields rose, after Bernanke's press conference last Wednesday. Since then, the 30-year mortgage rate spiked from 3.9% to nearly 4.5%, it's biggest one-week gain in 26 years.

Related: Scary times hit mortgage shoppers

But Stein urged the public not to read too much into the volatility.

"Consumers and businesses who look to asset prices for clues about the future stance of monetary policy should take care not to over-interpret these movements," he said in prepared remarks. "We have attempted in recent weeks to provide more clarity about the nature of our policy reaction function, but I view the fundamentals of our underlying policy stance as broadly unchanged."

The comments echo similar speeches this week by five other Fed officials, who have all said that the Fed's controversial stimulus program could continue at full blast if economic growth doesn't live up to their expectations.

Ultimately, the policy depends on the economic data, not a calendar date, they've said.

The current stimulus program marks the third round of so-called quantitative easing, or QE3 for short, and entails buying $85 billion in Treasuries and mortgage-backed securities each month. The question is when will the Fed start to reduce the pace of those purchases each month, and when will it end the program completely?



Last week, Bernanke said the Fed is considering tapering the program "later this year" and could bring it to an end in mid-2014, should the unemployment rate fall to roughly 7% over that time frame.

In his remarks Friday, Stein laid out September as a hypothetical time frame for tapering the program.

Two more Fed speeches are scheduled later Friday, including remarks by Richmond Fed President Jeffrey Lacker, who has largely been a critic of QE3, and San Francisco Fed President John Williams.

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Closing ranks, Fed officials push back on 'out of sync' markets

NEW YORK/WASHINGTON - In remarkably similar tones, two influential Federal Reserve policymakers on Thursday sought to dissuade investors that monetary accommodation was fading any time soon, each going so far as to say markets have misinterpreted the U.S. central bank's intentions.

The separate speeches from New York Fed President William Dudley and Fed Governor Jerome Powell underscore how uneasily U.S. policymakers have been watching the sharp retrenchment in global markets since last week, when the central bank unveiled a timeline for the reduction and eventual end to asset purchases.

The concerted effort this week by not only Fed officials but also European central bankers appeared to be working. Global stock and bond markets rose on Thursday as fears eased of an imminent end to stimulus for the world's largest economy.

Financial market conditions started tightening last month but accelerated sharply last week when Fed Chairman Ben Bernanke said the central bank expected to reduce the pace of bond buying later this year, and to end the QE3 program altogether by mid-2014, if the economy improves as expected.

But Dudley said the so-called quantitative easing program, or QE3, would be more aggressive than the timeline Bernanke outlined if U.S. economic growth and the labor market turn out weaker than expected. The timeline depends not on calendar dates but on the economic outlook, he argued.

"Economic circumstances could diverge significantly from the FOMC's expectations," Dudley told reporters at a briefing at the New York Fed's headquarters, referring to the policy-setting Federal Open Market Committee.

"If labor market conditions and the economy's growth momentum were to be less favorable than in the FOMC's outlook — and this is what has happened in recent years — I would expect that the asset purchases would continue at a higher pace for longer," he said.

Financial markets have been rocked since Bernanke's comments, with yields on 10-year U.S. Treasury debt spiking to near a two-year high. The across-the-board higher cost of borrowing runs the risk of tripping up a U.S. recovery that is showing signs of resiliency but has faltered the last few years.

Powell also stressed that the reduction in QE3 could be delayed and in all likelihood "will continue for some time." The $85-billion pace could be reduced more quickly than currently planned, or even boosted if needed, he told the Bipartisan Policy Center, a Washington think-tank.

"Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy," Powell said.

"To the extent the market is pricing in an increase in the federal funds rate in 2014, that implies a stronger economic performance than is forecast either by most FOMC participants or by private forecasters," he added.

A third Fed policymaker, Dennis Lockhart of the Atlanta Fed, like Dudley and Powell argued on Thursday that the economy's path will determine the fate of the central bank's bond buying. But he added that it would be appropriate to pull back a bit if the economy performs as expected.

"There is no 'predetermined' pace of reductions in the asset purchases, nor is the stopping point fixed," Lockhart said in remarks prepared for delivery to the Kiwanis Club of Marietta.

INVESTORS VS POLICYMAKERS

Frustrated with fitful U.S. recovery from the Great Recession, the central bank has kept the federal funds rate near zero since late 2008 and has promised to keep it there at least until the unemployment rate falls to 6.5 percent from 7.6 percent now, as long as inflation stays below 2.5 percent.

According to futures contracts at the Chicago Board of Trade, traders had brought forward expectations for the first interest-rate hike to late 2014 despite published forecasts that show most Fed policymakers don't expect to tighten until 2015.

Dudley, a close ally of Bernanke who like Powell has a permanent vote on policy, argued recent market expectations for an earlier rate rise are "quite out of sync" with the statements and expectations of the FOMC.

Even under the timeline for reducing QE3, "a rise in short-term rates is very likely to be a long way off," Dudley said, adding that even when 6.5 percent unemployment is reached the Fed could leave rates near zero for "considerably longer."

The labor market, which the Fed is targeting with its QE3 stimulus, "still cannot be regarded as healthy," Dudley said, adding "there remains a great deal of slack in the economy."

The Fed's two main stimulus efforts - QE3 and low rates - are tied in different ways to sustainable economic growth, which for the first quarter was a below-average 1.8 percent, another worrying sign for the world's largest economy.

U.S. stocks climbed and the yields on U.S. Treasuries eased on Thursday as markets showed signs of stabilizing after the recent dramatic selloff.

Powell said that some of this disturbance was probably unavoidable, given the delicate task of communicating evolving views on the economy and Fed policy. But he also argued that real interest rates remained low by historic standards, while equity valuations looked like they were within normal ranges.

Dudley said the Fed is watching markets closely: "It's no question that tighter financial conditions will have some impact on the growth rate... But much more important than that is what this economic data actually reveals about how this tug of war between fiscal policy and improving fundamentals gets resolved."

Asked about Bernanke's attempt last week to clarify the plan for QE3, Dudley said: "Some market participants took that as a hint or a signal, and I don't think that was meant at all.

"We're trying to communicate, plain speaking, in a very transparent style," he added. "If people misinterpret that as us sending hints - I just think that's not what we're trying to do."

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Federal Safety Officials To Investigate Ohio Air Show Crash

Wing walker Jane Wicker performs at the Vectren Air Show just before crashing on Saturday. She and pilot Charlie Schwenker were killed.

Federal air safety officials say they will investigate the fiery crash of a stunt plane at an Ohio air show that killed the pilot and a wing walker.

Thousands of spectators at the Vectren Air Show near Dayton, Ohio, watched on Saturday as the biplane, with wing walker Jane Law Wicker, 46, and pilot Charlie Schwenker, 64, careened into the ground and exploded during a low-altitude maneuver. No one in the audience was hurt.

The rest of the show was canceled on Saturday, but was expected to resume Sunday.

The Associated Press reports:

"It wasn't clear Saturday what went so wrong. The biplane glided through the sky, rolled over, then crashed and exploded into flames ... A video posted on WHIO-TV shows the small plane turn upside-down as the performer sits on top of the wing. The plane then tilts and crashes to the ground, erupting into flames as spectators screamed."

The National Transportation Safety Board said it would investigate the crash of the 450 HP Stearmans biplane. The Dayton Daily News
quotes Terrence Slaybaugh, the director of aviation for the city of Dayton, as saying the investigation could take months.
"Obviously, this is a tragedy for what's a very small community and our thoughts and prayers go out to those two individuals and their families," Slaybaugh told reporters. "Right now, there's no conclusive answer about why the accident happened."