The officials, including William C. Dudley, president of the Federal Reserve Bank of New York, said that the Fed sees reason for optimism about economic growth, but that the goals of its stimulus campaign and the likely timeline remain unchanged.
The remarks, delivered in separate but similar speeches, reflected the Fed’s frustration with a tightening of financial conditions that began in May and accelerated last week after the Fed’s chairman, Ben S. Bernanke, said stronger economic growth likely would allow the Fed to reduce its monthly bond purchases later this year.
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.
“Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” Jerome H. Powell, a Fed governor, said in Washington. “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.”
On Thursday, Wall Street stock indexes — already up strongly before the speeches — added to their gains for a rise of about 1 percent. Yields on 10-year Treasury bonds fell 5.8 points to 2.478 percent.
The message delivered by the three officials combined reassurance and tough love. While insisting that the Fed would not allow the broader economy to falter, they reiterated that they do not see a need to continue the present level of support for much longer. And they said that a certain level of negative reaction from investors was a predictable and perhaps necessary part of the readjustment process.
“It’s important not to overinvest in what the markets have done,” Mr. Dudley said. While the Fed would pay close attention to financial conditions, which can affect the broader economy, he said, the pace of growth would be determined by the sum of a strengthening private sector and a shrinking public sector. He said he was optimistic that by next year the result would be increasingly strong growth.
The Fed is struggling in a world of its own creation. The central bank, seeking new ways to stimulate the economy, has sought increasingly to manage investor expectations about the path of monetary policy. By convincing investors that it will keep interest rates low tomorrow, it can reduce borrowing costs today.
In essence, the Fed is asking investors to stake vast amounts of money on the proposition that it will do what it says. And investors, not surprisingly, have become increasingly paranoid about any sign that the Fed may change its plans.
The latest round of trouble began when Mr. Bernanke said that the Fed intended to reduce the volume of its monthly bond buying later this year. It currently buys $85 billion a month in Treasury securities and mortgage-backed securities, and officials are concerned that the purchases are destabilizing financial markets.
Mr. Bernanke insisted that the Fed was not altering its primary stimulus program, its stated intention to hold short-term interest rates near zero at least as long as unemployment remains above 6.5 percent and inflation stays under control.
But 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” the reduction in monthly bond buying.
Perhaps most strikingly, market pricing has shifted to reflect an expectation that the Fed will 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.
“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,” Mr. Dudley said in New York. “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,” he added, referring to the Federal Open Market Committee.
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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