Federal Reserve Chairman Ben S. Bernanke has repeatedly said a reduction in the Fed's $85 billion in monthly bond purchases wouldn't mean an end to record easing. Investors are behaving as if they don't believe him.
The yield on the 10-year Treasury note has risen to 2.19 percent, an almost 14-month high, from 1.63 percent on May 2 as investors bet the Fed will begin trimming bond buying. The surge is undermining Bernanke's unprecedented effort to hold down borrowing costs and combat 7.6 percent unemployment.
The Fed chairman needs to persuade markets that tapering monthly purchases wouldn't be a prelude to aggressive policy tightening and ensure rising interest rates don't choke off the weak U.S. economic expansion, said Michael Gapen, a former section chief at the Fed Board's Division of Monetary Affairs.
"They are playing with fire when they want to talk about tapering but don't explain how it fits in with the rest of the exit strategy clearly," said Gapen, a senior U.S. economist at Barclays Plc. "You risk the premature tightening that you want to avoid."
Bernanke, 59, will have an opportunity to retune the Fed's message during a press conference on June 19 after the Federal Open Market Committee concludes a two-day meeting and releases a policy statement. The committee also plans to provide forecasts for economic growth, inflation, unemployment and interest rates.
David Fuller's view I am sure that President Obama would reappoint Mr Bernanke for a third term, should he be willing to stay on at the Fed. However, the Chairman has already indicated that he wishes to retire with the expiration of his second term on 31st January 2014. That would almost certainly see Janet Yellen in the hot seat as his successor.
Meanwhile, Mr Bernanke will be hoping that he can smooth the path for QE reductions without roiling markets. I wish the current Fed Chairman and his successor well, but the task will not be easy, despite their best efforts. Markets are volatile by nature and it is a case of every man for himself. Women will do the same because this is not a gender issue. People may not be frightened, at least not initially, but they can stand aside with the push of a button, believing that discretion is the better part of valour. Others will follow.
The risks are far greater for bonds because bull markets of three decades' duration seldom end quietly. Higher bond yields will roil stock markets at some point but equities will benefit from a transfer of funds in their favour.