Stocks pay stiff price for clarity
WASHINGTON — Wall Street investors wanted clarity from Federal Reserve Chairman Ben Bernanke.
They didn't like it when they got it.
Bernanke set the record straight on Wednesday about the Fed's bond-buying program. He said the Fed expects to scale back bond purchases later this year and end the program entirely by mid-2014 if the economy continues to improve.
In response, investors dumped stocks and bonds in anticipation of rising interest rates.
The Fed has been buying $85 billion worth of Treasury and mortgage bonds a month since late last year. The purchases pushed long-term rates to historic lows, fueled a record-breaking stock market rally, encouraged consumers and businesses to borrow and spend and provided a crutch to an economy hobbled by federal tax hikes and spending cuts.
Confusion about the central bank's intentions set in last month after the Fed released a summary of its April 30-May 1 meeting: Several Fed policymakers said they were open to reducing the bond purchases as early as this week's meeting.
Bernanke, meanwhile, told Congress that the economy still needed help, but also that the Fed might decide to cut back the bond purchases within “the next few meetings” — earlier than many had assumed.
The conflicting messages left investors bewildered. Just a hint of a pullback in the bond purchases sent bond prices plunging and their yields soaring.
So on Wednesday Bernanke, a former Princeton University professor, took pains to make the Fed's intentions as clear as possible.
Going beyond the formal statement the Fed's policy committee released after its two-day meeting this week, the chairman told reporters it would “be appropriate” to reduce the monthly bond purchases later this year and to end them by mid-2014 — if the economy performed as well as the Fed expects. He said the bond-buying probably will end when the unemployment falls to “the vicinity of 7 percent” from May's 7.6 percent.
Bernanke explained that the rest of the Fed's policymaking committee had “deputized” him to expand on what fit “into a terse FOMC statement.”
He said any reductions in bond buying, which keeps long-term rates low, would occur in “measured steps.” And the Fed will remain flexible: If the economy proves weaker than expected, the Fed might decide to restore the higher level of bond purchases to try to drive down long-term rates again.
Plans to reduce the purchases are “very data-dependent, and that's important,” says Joseph Gagnon, a former Fed official who is now senior fellow at the Peterson International Institute for Economics.
Bernanke likened any pullback in bond purchases to a driver letting up on a gas pedal rather than applying the brakes.
He stressed that even after the Fed ends its bond purchases, it will continue to maintain its vast investment portfolio — which has ballooned to $3.4 trillion — to help keep long-term rates down.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Home appraisal is below sales price — now what?
- Increased credit card use reflects confidence, flat wages
- Tourists rush to visit Cuba before American influence felt
- If you get this letter from the IRS, it’s legitimate
- Falling demand for steel not likely to reverse any time soon
- Corporate missteps hurt reputations, profits, sometimes in long run
- Heinz merging with Kraft in mega-deal; headquarters to stay in Pittsburgh
- Series of recalls could hurt Giant Eagle’s reputation
- Farmers fund research on gluten-free wheat
- Stop foreign dumping, U.S. Steel CEO Longhi tells Congress
- Venting online about job protected