The message, delivered in three separate but similar speeches, reflects the Fed’s frustration with a broad rise in interest rates that began in May and accelerated after remarks last week by the Fed’s chairman, Ben S. Bernanke.
“I don’t want to be too cute about a serious matter,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in Marietta, Ga., “but to make an analogy, it seems to me the chairman said we’ll use the patch — and use it flexibly — and some in the markets reacted as if he said ‘cold turkey.’ ”
The speeches, including one by William C. Dudley, president of the Federal Reserve Bank of New York and one of Mr. Bernanke’s closest allies, appeared to make an impression, helped along by upbeat domestic economic data and an easing of concerns about Chinese financial conditions. Stocks rose modestly, ending up for the third day in a row, while interest rates ticked downward, inverting the recent pattern.
On Wall Street, the broad Standard Poor’s 500-stock index had risen for most of the first five months of the year, bringing it to a high of 1,669.16 on May 21. But the next day, after Mr. Bernanke first hinted at an impending change in Fed policy, stock prices began falling, and the S. P. 500 eventually dropped 5.7 percent to a low on June 24, a few days after the most recent Fed policy statement. Since then, as Fed officials have sought to clarify their goals, the index has risen 2.5 percent, including Thursday’s 0.6 percent increase.
On Thursday, the three officials emphasized that the Fed was increasingly optimistic about the durability of economic growth. And they reiterated that they expected to reduce the volume of the Fed’s monthly bond purchases later this year. But the Fed’s overall effort to reduce borrowing costs will continue as long as necessary, most likely for years to come.
Investors, they said, need to gently place interest rates back down on the floor.
“Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” said the Fed governor Jerome H. Powell.
Mr. Dudley, who is also the vice chairman of the Fed’s policy-making committee, was even more emphatic. Investors expecting an early exit are “quite out of sync” with the Fed, he said. “A rise in short-term rates is very likely to be a long way off.”
The Fed is struggling in a world of its own creation. The central bank, seeking new ways to stimulate the economy, has sought 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 sums on the proposition that it will do what it says. And investors, unsurprisingly, have become increasingly fearful about any sign that the Fed may change its plans.
The mainstay of the Fed’s stimulus campaign is its stated intention to hold short-term interest rates near zero as long as the unemployment rate remains above 6.5 percent. It has put further pressure on longer-term rates by amassing more than $3 trillion in Treasury securities and mortgage-backed securities; since last December it has expanded those holdings by an additional $85 billion a month in a process known as quantitative easing, or Q.E.
Interest rates started rising in May after Mr. Bernanke suggested that the Fed might reduce the volume of its monthly purchases later this year. Rates rose much more quickly after he said last week that the Fed was planning to do exactly that.
Mr. Bernanke insisted that the Fed was not altering its plans for short-term rates. He said the Fed was not even altering its plans for asset purchases; it was just publicizing those plans for the first time. And he emphasized that the timetable would change if the economy grew more slowly than expected.
But investors “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,” wrote Jan Hatzius, chief economist at Goldman Sachs.
Nathaniel Popper contributed reporting.
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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