Federal Reserve officials stepped up their campaign to stem an increase in long-term borrowing costs that threatens to blunt the U.S. expansion and sought to clarify comments by Fed Chairman Ben S. Bernanke that sparked turmoil in global financial markets.
William C. Dudley, president of the Federal Reserve Bank of New York, said Thursday that any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.
Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61 percent last week from as low as 1.63 percent in May.
The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee, along with Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart, sought to damp expectations that an increase inthe benchmark interest rate will come sooner than previously forecast.
“Such an expectation would be quite out of sync with both [Open Market Committee] statements and the expectations of most [committee] participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.
Policy makers are considering when to end the biggest stimulus program in the Fed’s100-year history after pushing central-bank assets to a record $3.47 trillion.
Bernanke, at a June 19 news conference after a meeting of the Open Market Committee, outlined a plan for the reduction in the bond purchases that have helped spur growth and fuel a stock market rally. He said the Fed could start curtailing the current $85 billion pace later this year and end the bond purchases entirely around mid-2014, assuming the economy meets the Fed’s forecasts.
The market was already nervous before Bernanke’s statement, with the Associated Press reporting that over the past month, the Dow Jones Industrial Average alone saw more than a dozen triple-digit swings up and down.
In the two trading days after Bernanke’s statement, markets fell as traders bolted. The Dow fell 1.8 percent while the Standard & Poor’s 500 Index dropped 2.1 percent.
The stock market has rallied since Tuesday as investors took advantage of lower prices after the preceding week’s sell-off. Some analysts observed that investors seemed to realize they dumped too much stock the week before following Bernanke’s comments.
“It is pretty obvious that the Fed was caught off guard by the market’s reaction given the lengths to which they have gone to reshape market expectations,” Drew Matus, deputy U.S. chief economist at UBS Securities LLC in Stamford, Conn., and a former analyst at the New York Fed, said in an e-mail. “The range of both speakers and outlets suggests that these comments are, if not coordinated, then at least part of a collective - likely futile - effort to remold the market’s view of the June [Open Market Committee] press conference.”
Mortgage rates for 30-year loans surged to the highest level in almost two years, increasing borrowing costs at a time when the housing market is strengthening. The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, McLean, Va.-based FreddieMac said in a statement. The rate was the highest since July 2011 and above 4 percent for the first time since March 2012.
Spending by U.S. consumers rebounded in May after the largest drop in more than three years, a Commerce Department report showed Thursday, a sign the economy can weather a second- quarter slowdown. Other reports showed the housing recovery is gaining momentum and consumers are becoming more confident.
Lockhart, using a smoking metaphor, said the investors had misinterpreted Bernanke’s remarks.
“It seems to me the chairman said we’ll use the patch, and use it flexibly, and some in the markets reacted as if he said ‘cold turkey,” Lockhart said in a speech to the Kiwanis Club of Marietta in Georgia.
Powell said that a decision to reduce purchases would depend on economic data, and that there’s no set timetable.
“I want to emphasize the importance of data over date,” Powell said at the Bipartisan Policy Center in Washington. “In all likelihood, the current” large-scale asset purchases “will continue for some time.”
The officials spoke a day after a Commerce Department report showed first quarter growth in the United States was less than forecast as the end of a payroll tax break reduced consumer spending.
“I continue to see the economy as being in a tug-ofwar between fiscal drag and underlying fundamental improvement, with a great deal of uncertainty over which force will prevail in the near term,” Dudley said.
A report due this week from the Labor Department may show that the unemployment rate fell to 7.5 percent this month from 7.6 percent,according to the median forecast in a Bloomberg survey of economists. Employers probably added 165,000 workers to payrolls, down from 175,000 the prior month. The jobless rate peaked at 10 percent in October 2009.
“If labor market conditions and the economy’s growth momentum were to be less favorable than in the [committee’s] outlook - and this is what has happened in recent years - I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said.
Much of the decline in the jobless rate, Dudley said, is a result of workers leaving the labor force. “Job loss rates have fallen, but hiring rates remain depressed at low levels,” he said. “The labor market still cannot be regarded as healthy.”
The Open Market Committee has said it will keep its benchmark rate close to zero as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent.
“Not only will it likely take considerable time to reach the [Open Market Committee’s] 6.5 percent unemployment rate threshold, but also the [committee] could wait considerably longer before raising short-term rates,” Dudley said. “The fact that inflation is coming in well below the [committee’s] 2 percent objective is relevant here. Most [committee] participants currently do not expect short-term rates to begin to rise until 2015.”
The strategy Bernanke laid out for tapering bond purchases was predicated on the economy growing in line with the Open Market Committee’s forecasts. Central bankers expect growth of 2.3 percent to 2.6 percent this year, according to projections released two weeks ago. The economy grew at a 1.8 percent rate from January through March, down from a prior reading of 2.4 percent.
For the Fed’s outlook to be realized, gross domestic product would have to expand at about a 3.3 percent average annual rate in the last six months of 2013, according to calculations by economists at BNP Paribas SA in New York.
Business, Pages 63 on 06/30/2013