Chairman of the Federal Reserve Ben Bernanke speaks about monetary policy and future prospects. Hints about QE3 are awaited, but the markets may be disappointed.
The dollar is strengthening before the press conference. Will Bernanke change its direction?
Earlier, the FOMC made no policy changes. The statement included minor changes in wording: inflation is now “picking up”, while unemployment is only declining, not “notably” declining. No mention of QE3 could be seen, as expected.
18:00 Growth forecasts have been lowered, inflation forecasts have been increased and unemployment forecasts have been lowered.
18:06 GMT EUR/USD is at 1.3177 before the presser, in the middle of the narrowing channel. All times are GMT.
18:11 Growth forecasts have been raised for 2012, but lowered for 2013 and 2014.
18:14 Two members that previously saw the rates rising only in 2015 now see the rise in 2014. That’s dollar supportive as well.
18:15 Press conference begins – Bernanke repeats the FOMC Statement and says policy is accomodative
18:16 Economy expanding moderately. Housing is a headwind. Global risks are present, but not like in the autumn.
18:17 Unemployment to decline slowly.
18:18 Inflation picked up, but oil price rise effect is temporary.
18:19 The collective judgement is that rates will rise towards late 2014.
18:20 Questions begin: Is QE3 closer? Answer: “We have been bold and aggressive”. We remain prepared to do what is needed, continue to assess whether employment and inflation are on the way to targets. Entirely prepared to take action. Tools remain on the table. Dollar slides.
18:21 Q: Is inflation too high? A: Inflation is close to target. Gasoline rise will “pass through the system” and is temporary.
18:23 Very comfortable with the consensus view.
18:24 Dollar loses ground, even though Bernanke said nothing really new with “all tools are on the table”.
18:25 How much weakness is needed for more action? Remain prepared to use “balance sheet tools” (aka QE).
18:26 Dollar fall limited now. EUR/USD at 1.3212.
18:27 Guidance would change according to the situation. Very general words… “The committee decision is more important than the individual forecasts”
18:28 Q: Why not to use the additional tools? A: My views today are consistent with comments about the BOJ 15 years ago.
18:29 “We are not in deflation like in 2010, when QE2 was used”.
18:30 The inflation rate is close to target, and policy is already easy.
18:30 Should we use more inflation to promote growth? Answer: No. Dollar strengthens
18:31 EUR/USD sliding towards 1.32.
18:32 Concerned that tax hikes will hurt the economy in 2013.
18:33 Why are growth forecasts lower in 2013 and 2014? Answer: Growth is still expected to pick up over time, enjoying loose monetary policy.
18:34 The headwinds are expected to move away over time. “I don’t know precisely why growth has been lowered, probably fiscal stuff.
18:35 The risk of higher inflation is a loss of credibility, making the Fed weaker in fighting employment.
18:36 In any model, inflation should stay around 2%.
18:37 Q: What about European problems? In January, financial markets have calmed thanks to LTRO. We recently saw more stress due to Spain and Italy. Actually Bernanke is just describing the situation.
18:38 Discussed the situation with the Europeans. They made serious progress: Greek deal, fiscal compact, financial firewall and LTRO.
18:39 Markets show that more work needs to be done.
18:40 Indeed, members have pulled forward their rate rise expectations.
18:41 Uncertainty high due to Europe, “fiscal cliff”. Guidance still remains despite changing rate rise expectations.
18:42 “Too big to fail” was part of the crisis, and we should fight this situation. “We are working and making progress” on this issue.: more supervision, Basel III, stress tests, liquidity requirement.
18:43 It must be safe for institutions to fail in the future. “Financial wills” will be prepared – plans for dismantling big institutions in case they fail. Failure will be done without big damage to the economy.
18:45 Has Fed communication improved? Answer: I think so: press conferences, lectures, forecasts, etc.
18:47 “I think there is better understanding of the Fed’s policies”
18:48 Interest rates would have been negative, but since it can’t, there is a 3 trillion dollar balance sheet.
18:49 What is “exceptionally low”? The vague language is because the different members have different views. Bernanke personally translates exceptionally low to today’s rate: 0-0.25%
18:50 Too big to fail could mean to eliminate the incentive to be “too big to fail” – making it a pain to be big and complex.
18:51 EUR/USD is climbing once again, but not above the day’s highs. Currently at 1.3214.
18:52 Q: What will happen with bond yields when Operation Twist expires? Objective isn’t to please or disappoint investors. There is some disagreement about how the Fed impacts yields. The Fed’s view is that the quantity makes the difference, not the flow.
18:53 No impact is expected when Operation Twist ends. If needed, the Fed will act (repeats previous statement).
18:54 The markets will already anticipate it, so no big moves will be seen.
18:55 Differences between the US and Japan: The US acted preemptively and aggressively to avoid deflation. In addition, we moved quickly to help banks.
18:56 We need strong monetary support to help the economy.
18:57 On declaring victory, it’s still too premature. Regarding the bond bubble, it’s due to a weak economy, safe haven demands and not only the Fed. There are good reasons for yields to be low.
18:59 Regarding the participation rate: it’s a long term trend related to women and aging population. Part of the trend is due to cyclical factors, and should improve later on.
19:00 What about the impact of good weather: it just shows how hard it is to assess economic data…
19:03 Regarding the “catch up”, it’s just a hypothesis, and if so, the pace will be more moderate.
19:03 We can’t jump to conclusions from the March NFP.
19:04 100K jobs only maintain the current situation. If employment falls, we have policy options. On the other hand, it could turn into a virtuous cycle…
19:05 Will names be attached to the forecasts? What frustrates you?
19:06 Names might be attached in the future. The most frustrating aspect is the slowness of the recovery, especially the unemployment.
19:07 Fiscal issues are also frustrating, hints Bernanke.
— Press conference ends —
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