Bernanke Says Fed Bond Purchases Not on 'Preset Course'
Comment of the Day

July 17 2013

Commentary by David Fuller

Bernanke Says Fed Bond Purchases Not on 'Preset Course'

Here are some highlights from Bloomberg's interesting report on the Fed Chairman's statement
Federal Reserve Chairman Ben S. Bernanke said the central bank's asset purchases "are by no means on a preset course" and could be reduced more quickly or expanded as economic conditions warrant.

"The current pace of purchases could be maintained for longer" if inflation remained too low, the outlook for employment became less favorable or "financial conditions -- which have tightened recently -- were judged to be insufficientlyaccommodative to allow us to attain our mandated objectives," Bernanke said today to the House Financial Services Committee.

If the economy improved faster than expected, and inflation rose back "decisively" toward the central bank's 2 percent target, "the pace of asset purchases could be reduced somewhat more quickly," the 59-year-old Fed Chairman said in prepared testimony. The Fed would also be prepared to increase the pace of purchases "for a time, to promote a return to maximum employment in a context of price stability."

The Fed chairman's remarks highlight the Federal Open Market Committee's desire to assure that the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases. Treasury yields have jumped since June 19, when Bernanke outlined a possible timetable for tapering purchases.


In today's testimony, the Fed chairman described labor markets as "far from satisfactory, as theunemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high."

While risks to the economy have diminished since late last year, Bernanke said, "the risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery."

The slow pace of the recovery means that it remains "vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated."


Bernanke and policy makers have had to gauge how much government spending cuts and higher tax rates are sapping consumer confidence and growth. JPMorgan Chase & Co. economists estimate that an expiration of tax breaks could reduce take-home pay this year by more than $100 billion.

Retail sales climbed 0.4 percent last month, about half of what economists forecast, and the figures showed households are replacing outdated vehicles and furnishing new homes while cutting back on electronics and meals outside the home.

"The consumer is under pressure," said Bob Sasser, chief executive officer of Chesapeake, Virginia-based discount retailer Dollar Tree Inc. "They're now facing higher taxes," a weak job market, "and the uncertainty around the economy," Sasser told analysts and investors on a conference call in May.

The U.S. faces a "very troublesome and challenging recovery," Kendall J. Powell, chairman and chief executive officer of Minneapolis-based General Mills Inc., said in a June 26 conference call with shareholders and analysts.

Still, Fed stimulus has helped fuel a housing-market rebound and this year's 17.5 percent surge in the Standard and Poor's 500 Index of stocks.


Slack in the labor market, including 7.6 percent unemployment last month, helped keep inflation for the 12 months ending May a full point below the Fed's 2 percent goal, reducing the odds of any tightening based on that measure. the participants on the FOMC. In December, when the committee expanded the program of $40 billion in monthly buying of mortgage bonds with purchases of $45 billion of Treasuries, about half of FOMC participants wanted to halt the stimulus around the middle of this year, according to minutes from the meeting.

The language suggests that concern over the risks from the program extends beyond the four Fed regional bank presidents who have publicly spoken out against it: Esther George of Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and Charles Plosser of Phildelphia.

David Fuller's view Ben Bernanke is inevitably a somewhat controversial figure, although obviously not due to his mild and studious demeanour. Instead, it is entirely because of the power and influence his unprecedented quantitative easing (QE) policies wield over the US economy and financial markets.

I have no issue with this, recalling that Mr Bernanke was appointed Fed Chairman precisely because he was the academic expert who said he knew how to avoid a repeat of the USA's 1930s Depression, and also a lengthy Japanese-style deflation. Today, we can credit him with avoiding another depression. However, we know there are some deflationary pressures in the US and also the global economy, not least because of the depression in parts of Europe, plus slumps experienced by South American resources economies following China's slowdown.

The US economy has recovered somewhat but is far from robust. While this is consistent with the data I have previously cited, stating that 'it takes at least five to seven years to recover from a credit crisis recession', it would be premature to call Mr Bernanke's QE's experiment an unqualified success. Moreover, half the Fed appears to believe that the risks of QE now outweigh the potential additional benefits.

What is beyond any doubt is that Wall Street (S&P 500 & Russell 2000) has been a big beneficiary of QE, which has also helped to lift a number of other stock markets, in addition to their own national policies. Nevertheless, US equities are currently clear outperformers, as you can see from this chart of the DJ World Stock Index Ex USA.

Is this outperformance due to the USA's three strong cards which I often mention: 1) competitive energy costs thanks to fracking; 2) superior technology in many areas; 3) many of the most successful corporate Autonomies?

They are certainly bullish factors, not least for the long term. However, a number of momentum players have clearly genuflected before Mr Bernanke and bought on the back of his QE largess. Wall Street is overbought, albeit still in form, but susceptible to a disappointment which will most likely be confirmed by the next clear downward dynamic. To see what those can look like, note the key day reversal which occurred on May 22nd.

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