IBJNews

World looks to Bernanke to clarify stimulus plans

Back to TopCommentsE-mailPrintBookmark and Share

Is the era of ultra-low interest rates nearing an end?

That's the question — and the fear — Chairman Ben Bernanke will face this week when he takes questions after a Federal Reserve policy meeting.

Financial markets have been gyrating in the 3½ weeks since Bernanke told Congress the Fed might scale back its effort to keep long-term rates at record lows within "the next few meetings"— earlier than many had assumed.

Bernanke cautioned that the Fed would slow its support only if it felt confident the job market would show sustained improvement. And earlier in the day, he said the Fed must take care not to prematurely reduce its stimulus for the still-subpar economy.

Yet investors were left puzzled and spooked by a mixed message. Fear spread that the Fed would soon slow its $85 billion-a-month in bond purchases. Those purchases have been intended to hold down long-term borrowing rates to spur spending. Many worried that a pullback in the bond purchases could boost long-term rates, trigger a stock selloff and perhaps weaken the economy.

On Wednesday, when the Fed ends a two-day policy meeting with a Bernanke news conference, the financial world will be looking to the chairman to settle the confusion. What, Bernanke will likely be asked, would show sustained improvement in the job market? And when will the Fed most likely slow the pace of its bond purchases?

Last month, the U.S. economy added a solid 175,000 jobs. But the unemployment rate was 7.6 percent. Economists tend to regard the job market as healthy when unemployment is between 5 percent and 6 percent.

Since Bernanke's vague public comments May 22, the Dow Jones industrial average has fluctuated sharply and shed about 3 percent of its value. But the bigger shock has been in the bond market. The rate on the benchmark 10-year Treasury has jumped from a low of 1.63 percent in early May to 2.13 percent.

Higher rates ripple through the economy by making mortgages and other loans costlier. The average rate on the 30-year fixed mortgage, which tends to track the 10-year Treasury yield, reached 3.98 percent last week, according to Freddie Mac. That's its highest level since April 2012.

Just as cheap mortgages have helped feed a housing recovery, higher rates might slow it. Refinancings have declined since Bernanke's comments led to higher mortgage rates: Refinancings are 36 percent below their recent peak at the start of May, according to the Mortgage Bankers Association.

Compounding the confusion stirred by Bernanke's remarks have been comments from other members of the Fed's policy committee. Minutes of the previous meeting suggest a sharp division: Some, like Bernanke, still stress the need to fight high unemployment with low rates. Others warn that rates kept too low for too long raise the risk of high inflation and financial instability later.

The Fed's investment purchases have swollen its portfolio to $3.4 trillion — a four-fold increase since before the 2008 financial crisis. Eventually, the Fed will need to gradually sell its portfolio. Doing so would likely lead to higher rates. Yet some think it would also defuse some risks to the financial system.

Alan Greenspan, who preceded Bernanke as Fed chairman for nearly two decades, said in a recent interview on CNBC, "The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve — that everybody agrees is excessive — the better."

Economists say Bernanke will seek to clarify the Fed's message Wednesday. Yet they're unsure what he'll say.

Some think he could spell out the Fed's likely timetable for curtailing its bond purchases. The earliest the Fed is expected to announce a pullback is at its September meeting — and only then if unemployment has declined and the economy is growing faster than its current sluggish annual pace of around 2 percent.

Other analysts think the economy will not have recovered enough by September. They believe the earliest the Fed will reduce its stimulus is at its final meeting of the year in December. Until then, they think Bernanke will seek to reassure investors that the Fed will make sure the economy has strengthened before it acts.

"The Fed has worked very hard to get stock prices and home prices rising to help the economy, and I don't think they want to back away from that in any way," said Mark Zandi, chief economist at Moody's Analytics. "I think Bernanke will deliver a strong message that the Fed is not going to taper until the job market is improving in a consistent way."

Some in this camp say the economy will continue to be held back by a Social Security tax increase that kicked in in January and by federal spending cuts that began taking effect March 1.

"There is nothing in the underlying economy that would suggest the Fed needs to change policy any time soon," said Brian Bethune, an economics professor at Gordon College in Massachusetts. "There is considerably slower growth on the radar screen and absolutely no inflation to worry about."

Indeed, the Fed's preferred gauge of inflation tied to consumer spending rose just 0.7 percent in the 12 months that ended in April— far below the Fed's 2 percent target.

Some think Bernanke will want to signal to investors on Wednesday that the Fed is moving toward at least the start of a reduced pace of bond purchases in the second half of the year. Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, suggested one possible approach: The Fed could reduce its $85 billion a month in purchases to about $60 billion in September, then to about $35 billion early next year, then stop the purchases altogether by spring.

Even when the Fed stops buying bonds, it's expected to maintain its current holdings, which would continue to exert downward pressure on long-term rates.

Whatever guidance Bernanke offers Wednesday could help steady markets for a key reason: It will reduce uncertainty.

Margie Patel, a portfolio manager at Wells Fargo Capital Management, thinks investors will remain calm even after the Fed slows its stimulus. She noted that the economy has been improving, however gradually.

"There's no sector you can look at that's extremely dependent on the low rates for growth, even housing," she said. "If rates went up modestly, housing is still more affordable than it has been in years."

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
thisissue1-092914.jpg 092914

Subscribe to IBJ
  1. Cramer agrees...says don't buy it and sell it if you own it! Their "pay to play" cost is this issue. As long as they charge customers, they never will attain the critical mass needed to be a successful on company...Jim Cramer quote.

  2. My responses to some of the comments would include the following: 1. Our offer which included the forgiveness of debt (this is an immediate forgiveness and is not "spread over many years")represents debt that due to a reduction of interest rates in the economy arguably represents consideration together with the cash component of our offer that exceeds the $2.1 million apparently offered by another party. 2. The previous $2.1 million cash offer that was turned down by the CRC would have netted the CRC substantially less than $2.1 million. As a result even in hindsight the CRC was wise in turning down that offer. 3. With regard to "concerned Carmelite's" discussion of the previous financing Pedcor gave up $16.5 million in City debt in addition to the conveyance of the garage (appraised at $13 million)in exchange for the $22.5 million cash and debt obligations. The local media never discussed the $16.5 million in debt that we gave up which would show that we gave $29.5 million in value for the $23.5 million. 4.Pedcor would have been much happier if Brian was still operating his Deli and only made this offer as we believe that we can redevelop the building into something that will be better for the City and City Center where both Pedcor the citizens of Carmel have a large investment. Bruce Cordingley, President, Pedcor

  3. I've been looking for news on Corner Bakery, too, but there doesn't seem to be any info out there. I prefer them over Panera and Paradise so can't wait to see where they'll be!

  4. WGN actually is two channels: 1. WGN Chicago, seen only in Chicago (and parts of Canada) - this station is one of the flagship CW affiliates. 2. WGN America - a nationwide cable channel that doesn't carry any CW programming, and doesn't have local affiliates. (In addition, as WGN is owned by Tribune, just like WTTV, WTTK, and WXIN, I can't imagine they would do anything to help WISH.) In Indianapolis, CW programming is already seen on WTTV 4 and WTTK 29, and when CBS takes over those stations' main channels, the CW will move to a sub channel, such as 4.2 or 4.3 and 29.2 or 29.3. TBS is only a cable channel these days and does not affiliate with local stations. WISH could move the MyNetwork affiliation from WNDY 23 to WISH 8, but I am beginning to think they may prefer to put together their own lineup of syndicated programming instead. While much of it would be "reruns" from broadcast or cable, that's pretty much what the MyNetwork does these days anyway. So since WISH has the choice, they may want to customize their lineup by choosing programs that they feel will garner better ratings in this market.

  5. The Pedcor debt is from the CRC paying ~$23M for the Pedcor's parking garage at City Center that is apprased at $13M. Why did we pay over the top money for a private businesses parking? What did we get out of it? Pedcor got free parking for their apartment and business tenants. Pedcor now gets another building for free that taxpayers have ~$3M tied up in. This is NOT a win win for taxpayers. It is just a win for Pedcor who contributes heavily to the Friends of Jim Brainard. The campaign reports are on the Hamilton County website. http://www2.hamiltoncounty.in.gov/publicdocs/Campaign%20Finance%20Images/defaultfiles.asp?ARG1=Campaign Finance Images&ARG2=/Brainard, Jim

ADVERTISEMENT