Bernanke Sees Beginning of End for Fed’s Record Easing (Jun 2013)

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Source: Bloomberg – Bernanke Sees Beginning of End for Fed’s Record Easing

Notable excerpts:

Federal Reserve Chairman Ben S. Bernanke is putting investors on notice that the central bank is prepared to begin phasing out one of the most aggressive easing programs in its century-long history later this year.

The Fed will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the world’s largest economy performs in line with Fed projections, Bernanke told reporters yesterday in Washington after a two-day meeting of the Federal Open Market Committee.

Stocks and Treasuries tumbled at the prospect of a wind-down in bond buying that’s swollen the Fed balance sheet to a record $3.41 trillion in an attack against the worst joblessness since the Great Depression. While citing waning risks to the economy, Bernanke said curbs to bond buying hinge on gains in the labor market and a pickup in growth.

The yield on the benchmark 10-year Treasury (USGG10YR) note rose 7 basis points to 2.42 percent at 11:40 a.m. London time, the highest since August 2011. The yield jumped 17 basis points yesterday, the most since October 2011.

The conclusion to record stimulus may take years to complete as the Fed’s forecasts showed most officials don’t expect to begin raising the benchmark lending rate out of its lowest-ever range of zero to 0.25 percent until 2015.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said, referring to the FOMC’s outlook for “moderate” economic growth, further labor-market gains and inflation accelerating toward the Fed’s 2 percent goal.

If such gains are maintained, “we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he said. A “strong majority” on the FOMC now expects it won’t sell mortgage-backed securities as part of their exit strategy.

The chairman’s description of the end of quantitative easing indicates that Fed officials see the economy finally healing from a burst credit bubble that deflated housing prices by 35 percent over almost six years, left one in 10 American workers unemployed in October 2009 and prompted the biggest overhaul of financial regulation since the 1930s.

The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. The Fed added $45 billion of Treasury purchases in December. The FOMC has said since September that it will buy bonds until seeing signs of substantial labor-market improvement.

Reducing stimulus and winding down the balance sheet without roiling markets is one of the biggest challenges Bernanke’s successor would face, should the chairman not serve a third, four-year term.

Speculation the Fed will reduce purchases has lifted mortgage rates and government bond yields since May 22, when Bernanke told U.S. lawmakers the FOMC “could” reduce buying within “the next few meetings” if policy makers see evidence of labor-market gains that can be sustained.

Mortgage rates have posted six straight weekly gains that pushed home borrowing costs up 19 percent for the biggest increase in a decade. The interest rate on a 30-year fixed home loan climbed to a 14-month high of 3.98 percent last week, according to data compiled by Freddie Mac. The yield on the 10-year Treasury has jumped from a record low 1.38 percent in July.

Bernanke said Treasury yields have climbed in part because of optimism about the economy, and higher borrowing costs are offset by conditions such as increasing house prices. The S&P/Case Shiller index of property values in 20 cities rose 10.9 percent in March for the biggest annual gain since 2006.

“One important difference now is that people are more optimistic about housing” and expect prices to continue rising, he said. That gain “compensates to some extent for a slightly higher mortgage rate.”

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