Bernanke’s presser: QE could end in late 2014, sees case

The Fed finally made the move and announced a $10 taper. However, not only was the size small, but it was accompanied with more dovish text.

And then , Ben Bernanke made his last post FOMC decision press conference and had quite a few interesting things to say.

Highlights

• Forward guidance enhanced: emphasized that these are thresholds and not triggers.
• Low inflation also allows for low rates, and needs to rise
• Rate hikes projected around late 2015.
• Asset purchases are not on a preset course
• Similar moderate steps throughout 2014 and QE could end late in the year.
• We don’t want to look just at the unemployment rate.
• Sees a case for stronger inflation.
• Yellen fully supported this decision.
• Analysis: Sweet Dectaper is still a taper – USD has the upper hand

Live Blog

• 19:20 GMT: Presser begins at 19:30. All times are GMT.
• 19:21 Various news outlets such as Bloomberg TV are broadcasting the press conference.
• 19:22 The dollar enjoyed a nice rise at first, but the details then reversed the move. The stronger currencies have advanced against the greenback, while the weaker ones stayed behind. Here is the preview about currency positioning before the event.
• 19:25 EUR/USD is higher.
• 19:28 The Fed chose to taper only $10, the minimum. Less than that wouldn’t have been taken seriously.
• 19:30 Press conference begins
• 19:31 Bernanke goes straight to the point – tapering with stronger forward guidance.
• 19:32 Economy has done well despite fiscal drag. Recovery far from complete. Underemployment major concern.
• 19:33 Bernanke highlights worries about inflation.
• 19:34 Growth is expected to increase in the next few years.
• 19:34 EUR/USD stabilizing at 1.3780.
• 19:34 Bernanke details on the updated economic forecast. They are mentioned in the report about the tapering.
• 19:35 Bernanke talks QE: 2.9 million jobs added since QE3, and unemployment fell. This increased our confidence. Bernanke mentions NFP.
• 19:36 Risks are now balanced and not tilted to the downside.
• 19:37 Monetary policy aims to support the economy.
• 19:37 EUR/USD unexcited above 1.38.
• 19:38 Further QE data dependent.
• 19:38 Forward guidance enhanced: emphasized that these are thresholds and not triggers.
• 19:39 FOMC predicts that low rates will continue well past the time that unemployment falls below 6.5%.
• 19:40 Low inflation also allows for low rates, and needs to rise.
• 19:40 Low rates expected until around 2015.
• 19:40 EUR/USD back down below 1.38.
• 19:41 Asset purchases are not on a preset course.
• 19:42 Highly accommodative monetary policy.
• 19:43 Questions begin.
• 19:44 Steps are data dependent.
• 19:44  Similar moderate steps throughout 2014.
• 19:44 MBS vs. treasuries: equal reductions are the best.
• 19:45 EUR/USD at 1.3780.
• 19:45 We don’t want to look just at the unemployment rate.
• 19:46 First rate increases around the end of 2015.
• 19:47 What role did Yellen play in forming the policy?
• 19:47 I consulted Yellen who fully supported this decision.
• 19:48 The case why inflation might rise: healthcare has been low, wage growth slow, etc.
• 19:49 EUR/USD now falls.
• 19:49 Falling oil prices push inflation lower.
• 19:50 Q: Have you reached the limits of the policy tools? Monetary policy cannot solve all our problems.
• 19:51 Fiscal policy is going in the opposite direction.
• 19:51 We were not sure we could offset the fiscal drag.
• 19:52 We see a cumulative improvement in the labor market.
• 19:53 We assume a small pickup in growth next year.
• 19:54 Q: What about undoing tapering?
• 19:55 Our basic tools are asset purchases but not corporate stuff. We can manage our forward guidance. Up to now it was successful, but markets could see it as not credible.
• 19:56 We do not have the authority to lend directly to businesses. Firms are not looking for credit, or have weak balance sheets.
• 19:57 We are already pretty aggressive.
• 19:58 The Fed managed to stabilize the financial system in troubled times.
• 19:59 We needed to use new methods: QE and FG.
• 20:00 True that managing the balance sheet becomes more difficult. Future monetary economists will look at it more carefully.
• 20:01 The economy needed another boost, so we brought in QE3. And now, this is not a tightening move. The balance sheet is still growing.
• 20:02 What about a lower bound for inflation? Answer: We can do it in the future, but chose to strengthen the FG.
• 20:03 Asset purchases are still there to be used.
• 20:04 Why not do more? Answer: we are not doing less. While we are slowing QE a bit, the balance sheet is growing and will stay large. Accommodation is still high. There is a case for being aggressive, and that’s what we’re doing.
• 20:05 Why is the recovery so slow? Answer: number of reasons: less innovation due to the financial crisis, housing bust depressed housing sector, problems in Europe, very tight fiscal policy. People don’t appreciate the fiscal drag.
• 20:06 One million workers difference between this recession and the previous one.
• 20:08 Compared to other countries, the US recovery has been good. In retrospect, it’s not shocking that the retrospect has been tepid.
• 20:09 The budget deal is “nice” – compared to October. It eases the fiscal restraint, now that the economy needs help.
• 20:10 More work needs to be done. It will be good if congressional leaders work together and make some progress.
• 20:11 Bernanke talks about bank stress tests.
• 20:12 EUR/USD now stabilizing lower, at 1.3760.
• 20:13 It’s not up to me to say if these measures are tough enough (bank regulation).
• 20:15 I made an effort to make the Fed more transparent and more accountable.
• 20:17 I was slow to identify the crisis.
• 20:20 There are still quite a few uncertainties.
• 20:21 It’s going to take faster overall growth to make companies invest more.
• 20:23 QE is a secondary tool behind interest rates.
• 20:24 We delivered large returns for the taxpayer.
• 20:25 We don’t understand what moves the term premium.
• 20:26 QE, while effective, are therefore a secondary tool.
• 20:27 QE may have caused some bubbles, and the unwinding is also an issue.
• 20:27 Financial instability has impact on the economy. Regulatory moves also help.
• 20:28 We aim to end QE because we achieved our goal rather than becuase of fear of bubbles.
• 20:33 Congress is our boss. We are independent to make our policies, but Congress sets our mandate.
• 20:34 When Congress does review the Fed, a complicated task, it will be very interesting. I hope they will use the most qualified people.
• 20:35 A lot of the declines in the participation rate are demographic and reflect sociological trends. Some trends began earlier (participation rate, etc.).
• 20:36 USD is the boss: EUR/USD is close to losing 1.37.
• 20:37 Press conference ends.

Background

Markets were not sure if tapering would come. It seems that the Fed found the smoothest way to taper.