U.S. government bonds sold off last week following December Fed meeting minutes indicating growing doubts inside the central bank about the effectiveness of quantitative easing. Yields on benchmark 10-year notes hit an eight month high of 1.975 percent on Friday, in part as investors priced out some of the Fed asset purchases traders had been counting towards the end of 2013.
Gabriel Debenedetti contributed to this post
Federal Reserve officials appear to be getting cold feet. Having just announced an open-ended bond buying program in September and then broadening it in December, minutes from last month’s policy meeting suggested an increasing caution about additional monetary stimulus among the Federal Open Market Committee’s core of voting members.
Federal Reserve Chairman Ben Bernanke spoke to reporters for well over an hour at his quarterly press conference this week, but he was vague on the most important question of monetary policy today: what exactly would it take for the central bank to either ramp up or curtail the pace of monthly asset purchases? Since bond buys have effectively replaced interest rates as the dominant tool of Fed policy in recent years, the central bank’s new thresholds, which reference only rates, are not particularly useful.
Updates with Fed decision
The Federal Reserve on Wednesday took the unprecedented step of tying its low rate policy directly to unemployment, saying it will keep rates near rock bottom until the jobless rate falls to 6.5 percent. That’s as long as inflation, the other key parameter of policy, does not exceed 2.5 percent.
As Federal Reserve officials debate whether to use thresholds for inflation and joblessness to guide monetary policy, Friday’s jobs report may be a cautionary tale. The idea of thresholds is to pick markers for potential policy change – an unemployment rate of 6.5 percent, for instance, as a guidepost for when the central bank might begin to raise rates – so that the market has a better idea of where Fed policy is headed. As the unemployment rate nears that level, the theory goes, investors will gradually start to price in tightening; if the unemployment rate rises again, they’ll price it out.
For the first time, Federal Reserve Chairman Ben Bernanke has given credence to the idea that America’s long-term economic potential may have been permanently scarred by the turmoil of recent years. In a speech to the Economic Club of New York, Bernanke said:
Sometimes, communication can be the art of what not to say. Federal Reserve Chairman Ben Bernanke took pains this week to make clear that the central bank’s indication that it will likely keep rates low until mid-2015 does not mean it expects growth to remain weak for that long.
Polling data courtesy of Chris Reese
We’ll know it when we see it. That’s essentially been the Federal Reserve’s message since it launched an open-ended bond-buying stimulus plan that it says will remain in place for as long “the outlook for the labor market does not improve substantially.” Which begs the question: how much larger is the central bank’s $2.9 trillion balance sheet likely to get?
Janet Yellen, the Federal Reserve’s influential Vice Chair and possible future replacement for Chairman Ben Bernanke, delivered an important speech this week. Entitled “Revolution and Evolution in Central Bank Communications,” Yellen traces the deep shift in sentiment towards the importance of policy transparency.
Federal Reserve officials have linked their open-ended stimulus program to substantial improvement in the labor market. So now, it’s up to Fed watchers to hone in on a definition of substantial, no small task in a world of multiple and often conflicting indicators on the job market.