July 11, 2020

Fed Official Plays Down Fears of Quick Retreat on Stimulus

William C. Dudley, president of the Federal Reserve Bank of New York, said that the Fed planned to reduce the pace of its bond purchases because it had greater confidence in the durability of the economic recovery, but it has not changed its commitment to support growth nor the scope of its other efforts.

Any increase in short-term rates is “very likely to be a long way off,” Mr. Dudley said in a speech in New York Thursday morning.

Mr. Dudley’s speech is the first by a close adviser to the Fed’s chairman, Ben S. Bernanke, since Mr. Bernanke roiled markets last week with the news that the Fed expects it will start cutting back on its bond buying later this year. The Fed is buying $85 billion a month in Treasury securities and mortgage-backed securities.

A second official, Jerome H. Powell, a Fed governor, delivered a similar message in a separate speech Thursday, saying that he saw signs of “real strength” in the economy, but that investors were misinterpreting the likely policy consequences.

“Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” Mr. Powell said. “In particular, the reaction of the forward and futures markets for short-term rates appears out of keeping with my assessment of the committee’s intentions, given its forecasts.”

The remarks reflect the Fed’s frustration with the tightening of financial conditions since Mr. Bernanke spoke, a response that threatens to sap the strength of the nascent recovery, including critical progress in the outlook for job growth.

Markets appear to have interpreted last week’s remarks as indicating that the Fed is inclined to pull back more quickly than previously understood from all of its efforts to stimulate the economy — not just from the expansion of its bond portfolio but also the duration of its plans to hold short-term interest rates near zero.

Investors, wrote Jan Hatzius, chief economist at Goldman Sachs, “seem to believe that Fed officials must have become at least somewhat more willing to consider earlier hikes if they are sufficiently comfortable with the economic outlook to preannounce Q.E. tapering” – a reduction in monthly bond buying.

The economic impact of the market’s reaction has been swift and significant. Wells Fargo, the nation’s largest mortgage lender, has raised its standard interest rate on 30-year loans from 3.9 percent to 4.625 percent. Yields on junk bonds have jumped 2 percentage points in less than two months, according to Barclays. Governments are facing higher borrowing costs to fund infrastructure projects.

Perhaps most strikingly, market pricing had shifted to reflect an expectation that the Fed would begin to raise interest rates by the end of 2014, despite the fact that 15 of 19 Fed officials indicated last week that they did not expect an increase until 2015.

A number of Fed officials have said since then that markets misunderstood the message. Mr. Bernanke, they noted, went out of his way to say that the Fed was not changing its plans for short-term rates. Indeed, he suggested that effort might be extended. The Fed is simply eager to wind down its latest round of bond buying.

Mr. Dudley delivered a particularly strong version of that argument in his Thursday speech. Stock indexes — which had been up strongly in morning trading before the speech — added to their gains afterward, rising more than 1 percent. The yield on 10-year Treasury bonds fell slightly to 2.504 percent.

“Some commentators have interpreted the recent shift in the market-implied path of short-term interest rates as indicating that market participants now expect the first increases in the federal funds rate to come much earlier than previously thought,” he said. “Such an expectation would be quite out of sync with both F.O.M.C. statements and the expectations of most F.O.M.C. participants,” referring to the Federal Open Market Committee.

But investors are skeptical in part because the Fed has tied the duration of its efforts to its economic forecasts, which other forecasters consider overly optimistic.

The Fed’s message is that its basic commitment has not changed. It wants a certain level of growth and believes the economy is getting stronger and therefore it can afford to do less. Mr. Bernanke said repeatedly at his news conference last week that if the Fed’s forecast changes, it is prepared to extend its campaign.

Article source: http://www.nytimes.com/2013/06/28/business/economy/fed-has-not-changed-commitments-official-says.html?partner=rss&emc=rss

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