Ease on.
That’s the message that Fed Chairman Ben Bernanke delivered this week, causing the bond market to rally, the stock market to hit new highs and the seas to part.
Putting a cherry on top of Bernanke’s comments, the S&P 500 surged 7.5% in just 12 days!
The chairman’s comments came while he was at the National Bureau of Economic Research in Cambridge, Mass., to give a speech about the 100 year history of The Fed. You can safely bet all of your earthly possessions that media were there not to hear his speech, but to ask questions afterward. There may have been a quid pro quo, though – if you want to ask a question, you have to sit through my speech.
The gist of Bernanke’s comments can be summarized in three parts:
- Quantitative easing (QE) will continue, if not forever, as long as Chairman Bernanke is in charge, unless data supports ending it, which will likely never happen.
- Contrary to the statement above, he didn’t say that tapering won’t begin in September, as many previously speculated.
- QE and interest rates are two separate things.
The Fed can justify continuing QE. The unemployment rate is still 7.6% and would be much higher if the record number of part-time workers were not included as being employed, and the economy is growing at a rate of 1.8%, which is lame even with the last four years as a benchmark.
But don’t you think that if QE were going to help the economy, it would have done so by now? Just asking.
Tapering? Forget About It
Just last month, talk of “tapering” was all the rage.
As we reported, Bloomberg interviewed 54 economists and nearly half of them believed that monthly bond purchases would drop from $85 billion to $65 billion in September and that QE would end completely in June 2014.
Bloomberg must have interviewed the wrong economists.
However, there appears to be growing dissension within The Fed’s ranks, as minutes of The Fed’s most recent meeting show that not everyone wants to remain on board the runaway QE train.
“About half” of 19 Fed members “indicated that it likely would be appropriate to end asset purchases later this year,” according to minutes of the June Fed policy-making committee meeting, released Wednesday.
So that’s nine and a half for more QE and nine-and-a-half against more QE in 2014.
Hedging On Tapering
And while the consensus now appears to be that QE will continue on through eternity, Bernanke never said that tapering won’t take place in September.
As J.P. Morgan’s Michael Feroli said on Zerohedge, “Nothing in yesterday’s remarks led us to question our view that tapering in September is coming, conditional on the data cooperating. To the contrary, when asked if he regretted mentioning slowing the pace of purchases recently, (Bernanke) stated that ‘notwithstanding some volatility that we’ve seen in the past six weeks, that speaking now and explaining what we’re doing may have avoided, you know, a much more difficult situation in another time.’ Rather than push back against the way his comments were interpreted, the Chairman seemed to welcome the better alignment of the market’s view with the Fed’s view.”
Interesting Interest Rates
In his comments, Bernanke made it clear that even if The Fed tapers its bond buying, it doesn’t mean The Fed will increase interest rates. In fact, even if The Fed brings its QE to a complete halt, it doesn’t mean interest rates will increase.
However, bond rally aside, interest rates have been going up, even without The Fed raising its rates. The mere mention of potential tapering sent rates up by 136 basis points (1.36%) for 30-year mortgages.
So the Fed funds rate may remain near zero, unaffected by QE, but the rates that consumers and businesses pay to buy homes, cars, equipment and other goods are on their way up, regardless of what The Fed does.
Bernanke may be powerful, but he can’t control everything.