Bernanke Live Blog – Explains the NO Taper

The Fed surprised by deciding NOT to taper QE, due to tightening financial conditions and the “fiscal entrenchment”. Bernanke faced the press to explain this decision. While the views regarding the end of QE remain, it is still not the time. The lack of a press conference in October does not imply no taper. The market surprise could have been desirable, as the outcome of lower long term interest rates serves to loosen the “tight financial conditions”.

Live blog of the event.

Highlights

• Meaningful improvement in jobs, but not satisfactory
• Views haven’t changed since June, but it is still not the time
• Fiscal policy weighs on economy.
• Not enough evidence of economic improvement.
• Tapering can happen this year, but “we are tied to the data”.
• Lack of press conference in October doesn’t imply no tapering.
• Market reaction to decision, lower bonds, was desirable.
• No comment on personal future

Live Blog

• 18:25 GMT – all times are GMT, press conference begins at 18:30.
• 18:25 You can watch the press conference live on many stations, such as here.
• 18:26 Major lines have been broken. GBP/USD finally made it above 1.60, and EUR/USD is close to 1.35.
• 18:27 This is especially surprising as many Fed officials came with an “open mind” into the FOMC meeting.
• 18:30 Press conference begins.
• 18:31 Improvement in job market does not mean satisfactory conditions.
• 18:31 Downside risks have diminished.
• 18:31 Tightening in financial conditions weighs
• 18:31 Fiscal policy is a source of downside risks.
• 18:32 FOMC anticipates that inflation gradually returns to normal.
• 18:33 Growth forecasts are higher for the future.
• 18:34 7.1% in 2013, 6.4% to 6.8% in 2014 and to reach normaility later on.
• 18:34 Inflation 1.1% to 1.2% in 2013, rising later.
• 18:34 Interest rate cannot be lowered…
• 18:34 Fed has two complimentary methods: communications and QE.
• 18:35 Bernanke details on QE and makes a historic account.
• 18:35 Bernanke mentions the reinvestment of maturing QE.
• 18:36 Meaningful progress in unemployment since the announcement until today, even though it is not satisfactory, in the past year.
• 18:37 The committee anticipated tapering in 2013 back in June, depending on the evolution of the economy.
• 18:38 The views haven’t changed since June. The committee prefers to wait for more evidence, but Bernanke does imply that QE could still end in mid 2014.
• 18:40 QE not on preset course.
• 18:42 Most participants see interest rate rise very slowly: 1% interest rate in 2015.
• 18:43 Even after winding down current policy, the policy will still remain accommodative.
• 18:44 Questions begin
• 18:45 Most of the improvement in the unemployment is due to real job creation.
• 18:47 Tough question: Is Bernanke responsilbe for tightening financial conditions. Bernanke defends the decision to begin talking about tapering.
• 18:47 The communication program “took about a year”.
• 18:48 Failing to communicate tapering would create a worse situation.
• 18:48 Looking to see if the data confirms progress, and could make tapering later this year.
• 18:49 Q: Will tapering happen this year? A: “We are tied to the data”.
• 18:51 The unemployment rate is not a great measure to the labor market conditions.
• 18:52 What about the future of Bernanke? No comment
• 18:54 Rates have gone up everywhere also due to better economic outlook, and that’s good.
• 18:55 The better we communicate, the better the market reaction.
• 18:57 Hard to project until 2016. Rates will probably gradually rise towards 4% sometime in the future.
• 18:59 Is a press conference necessary for a tapering decision?
• 18:59 Bernanke admits missing growth forecasts due to the severity of the crisis.
• 19:00 We haven’t anticipated the slowdown in productivity.
• 19:00 Unemployment has fallen faster than anticipated.
• 19:02 Lack of press conference in the next meeting doesn’t imply no tapering.
• 19:04 “We will do the right thing for the economy”. Data didn’t meet the standard of increasing growth and inflation moving towards target.
• 19:05 What about the government shutdown and the debt ceiling? A: These are complicated issues which I won’t get into. Both things can have negative consequences. We will do whatever we can.
• 19:06 Question on the 5 year anniversary to Lehman.
• 19:07 Answer: We should have forestalled the crisis. We did what we could afterwards.
• 19:08 Dodd-Frank, Basel III and other measures certainly helped. Financial firms are better capitalized.
• 19:09 There are tools to minimize damage.
• 19:10 How will you ever get out of quantitative easing? Is it effective?
• 19:11 QE has been effective according to Bernanke. There was some improvement, despite the fiscal policy.
• 19:13 Ultimately, we will reach substantial improvement and will remove stimulus. The rate policy is the stronger tool.
• 19:15 EUR/USD retreated from 1.35, but GBP/USD is above 1.61.
• 19:16 Bernanke wants to prevent a “too big to fail” situation.
• 19:17 Bernanke asked about the no taper surprise. Answer: easier conditions, as achieved today, is a desirable outcome. We want to avoid tightening until necessary.
• 19:18 This was a precautionary step.
• 19:19 I don’t think we are complicating things for future FOMCs.
• 19:20 The Fed has a high credibility, it is bipartisan, important institution, independent.
• 19:21 Why was forward guidance unchanged? It is important not to take any decisions lightly.
• 19:23 Certainly the case that there are too many people in poverty.
• 19:24 Not satisfied with labor market.
• 19:25 Our tools are limited.
• 19:25 What about emerging markets and reaction today?
• 19:26 The US is part of a global system. True that changes in long term interest rates have an effect on EM, espeically ones who peg their currencies, but this is not the only thing: investor sentiment, local economic situation, etc. Different EMs had different reactions.
• 19:27 Very important that emerging markets grows, it affect the US. The main point is that we are trying to do is trying to create a stronger US economy – a stronger US is good for everybody.
• 19:28 Press conference ends

Background

Contrary to all the hints and analysis, the Fed did not taper. It put some blame on the government and worsening financial conditions – the housing sector has turned worse.

The decision triggered a crash of the US dollar.

Further reading:  Fed tapering could trigger new financial crisis