NEW YORK (Reuters) – Investors’ hair-trigger reaction to Federal Reserve Chairman Ben Bernanke’s testimony on Wednesday marks a delicate new policy phase for the U.S. central bank in which communication is paramount.
Pitfalls lurk as the Fed approaches the time when it will begin to withdraw its extraordinarily accommodative policies, probably starting some time this year with a tapering of its $85 billion in monthly bond purchases.
A NUMBER OF PARTICIPANTS EXPRESSED WILLINGNESS TO REDUCE PACE OF BOND BUYING AS EARLY AS JUNE IF ECONOMIC GROWTH SUSTAINED -FED MINUTES
Very lengthy pause before #Bernanke answered the question on financial stability: “I would say that (concern) has increased a bit…” #Fed
Wildcard for Bernanke is how much he says about ‘exit strategy’… Hang on to MBS as Dudley suggests? #Fed
The Federal Reserve has a long list of worries about the unexpected consequences of its quantitative easing (QE) program. There’s the risk that all the bond-buying is quietly stoking bubbles in disparate asset classes, and the lingering risk of a future run-up in inflation, and even the political risk of balance sheet losses down the road. But above all, what really keeps Fed policymakers up at night might be their most immediate concern: that investors will overreact when they finally decide to reduce the $85-billion monthly pace of asset purchases.
In perhaps the starkest words yet from someone in Fed Chairman Ben Bernanke’s inner circle, here’s what New York Fed President William Dudley said about this in a speech to the Japan Society in New York on Tuesday: