While some Fed policy makers suggested that the central bank could begin reducing its monthly purchases of government bonds as early as next month, most still want to see continued evidence of an upswing in the job market and a decline in unemployment first, according to minutes of the most recent meeting of the Fed’s policy arm that were released Wednesday afternoon.
Confusion on Wall Street over the Fed’s intentions led to a topsy-turvy day in the stock market. The major indicators were up in the morning after Mr. Bernanke testified to a Congressional committee but then fell sharply after the meeting minutes were disclosed.
In his testimony, Mr. Bernanke said that ending the $85 billion monthly bond-buying effort too soon would do more harm than good.
“A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery,” he said.
While Mr. Bernanke clearly enjoys the support of a majority of the Fed’s Open Market Committee, the minutes suggested that he was finding it challenging to forge a consensus.
Under questioning from a lawmaker, Mr. Bernanke suggested that the Fed might cut back on bond purchases some time in “the next few meetings.” That statement took on greater significance on Wall Street after the minutes hinted at the more unnerving prospect of action as early as June.
Still, many analysts said the odds were against a change of direction at the Fed’s meeting next month.
“It’s been on the minds of committee members, but I don’t think the minutes mean they’re going to collectively take their foot off the gas in June,” said Erik Johnson, an economist with IHS Global Insight.
More likely, he said, would be a pullback beginning in late summer or early fall if the economy sustains its momentum. Even if that happens, the Fed will remain extraordinarily accommodative by many other measures, with short-term interest rates staying very low.
In response to a question from Representative Kevin Brady, a Texas Republican who is chairman of the Joint Economic Committee, Mr. Bernanke said that whenever the stimulus began to taper off, it would not happen in an “automatic, mechanistic program. Any change would depend on the incoming data.”
Further evidence for a move in a few months, rather than weeks, came in an interview shown on Wednesday on Bloomberg TV with the president of the Federal Reserve Bank of New York, William C. Dudley, that seemed aimed at clearing up some of the confusion.
“I think three or four months from now you’ll have a much better sense of is the economy healthy enough to overcome the fiscal drag or not,” said Mr. Dudley, who is a close ally of Mr. Bernanke.
Outside the canyons of Wall Street and the world of Fed watchers, the difference between June and August or September might not appear significant. But with interest rates at historical lows, any move to cut back on bond purchases by the Fed would undoubtedly cause an uptick in bond yields. That would affect the huge market for government and corporate bonds and force stock market investors to recalibrate their positions.
When the trading day began on Wednesday, investors were in a buoyant mood, sending stock indexes higher as Mr. Bernanke began his testimony. Markets around the world have rallied this year on hopes that the Fed and other central banks will continue to support financial markets with monetary policies.
As the day went on, though, traders began to reconsider some of Mr. Bernanke’s comments. After the details of the Federal Open Market Committee meeting on April 30 and May 1 were released, many strategists said they were surprised by the number of voices inside the Fed calling for a slowdown in the stimulus effort in the near future.
The minutes said, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”
In response, the Standard Poor’s 500-stock index finished the day at 1,655.35, down 13.81, while the Dow Jones industrial average fell 80.41 to 15,307.17. The tech-heavy Nasdaq index, which has been on a tear lately, sank 38.82 to 3,463.30, or slightly over 1 percent.
Mr. Bernanke indicated that he was not particularly worried that the stock market was moving into bubble territory, despite the 16 percent surge in the S. P. 500 since the beginning of the year.
“Our sense is that major asset prices like stock and bond prices are not inconsistent with fundamentals,” he said. Commonly used yardsticks for measuring the value of stocks, like price-to-earnings multiples, Mr. Bernanke concluded, are “fairly normal.”
Nathaniel Popper contributed reporting from New York.
This article has been revised to reflect the following correction:
Correction: May 22, 2013
An earlier version of this article incorrectly described the timing given by Mr. Bernanke of a potential Fed move. He said the Fed could prepare to “take a step down” in the next few meetings, not the next few weeks.
This article has been revised to reflect the following correction:
Correction: May 22, 2013
Article source: http://www.nytimes.com/2013/05/23/business/economy/bernanke-fed-stimulus-still-needed-to-help-recovery.html?partner=rss&emc=rss