But investors and ordinary home buyers alike have been speculating that the easy money will soon come to an end. The timeline provided by Fed Chairman Ben S. Bernanke on Wednesday was intended to address confusion over how the central bank will wean the economy from its support.
“It is important for us to communicate,” he said at a news conference. “We are determined to be as clear as we can, and we hope that you and your listeners and the markets will all be able to follow what we’re saying.”
Stock markets did not seem to like the message. The three major U.S. indexes plunged by more than 1 percent as investors confronted the eventual end of the Fed’s stimulus. The yield on 10-year Treasurys jumped nearly 8 percent amid a sell-off in the bond market. Most of the Fed’s purchases have been government debt.
Bernanke stressed that Fed officials will adjust their timeline for ending the bond purchases to the realities of the recovery. If the economy’s momentum was to evaporate, the Fed could slow or delay the wind-down of bond purchases. If the recovery was to take off, it could speed up the process.
“Our policy is in no way predetermined and will depend on the incoming data and the outlook,” Bernanke said.
He said he expects the unemployment rate to be about 7 percent when the Fed stops the program, down from the current 7.6 percent and a “substantial improvement” from the 8.1 percent jobless rate when the program began. Bernanke also predicted a pickup in economic growth over the next several quarters.
Overall, the Fed sounded a more optimistic note as it wrapped up its regular policy-
setting meeting in Washington on Wednesday. It pointed out that the risks to the economy have “diminished” since the fall. Bernanke cited the rebounding housing market and the weakening impact from tax hikes and government spending cuts as examples.
The Fed has said that tapering its bond-buying program would not mean it was ending its efforts to stimulate the economy. But the market reaction to Bernanke’s statements Wednesday suggested that investors do not share that view.
“So, in short, we now have more clarity around a policy that has not been definitively laid out but that also has not changed,” said Richard Moody, chief economist at Regions Bank. “It has been, is and will remain all about the evolution of the data.”
The slide in stocks underscored the challenges facing the Fed as it tries to articulate its plans for the future of the stimulus effort, one of the many unconventional tools the central bank has come to rely on since the financial crisis. The Fed has tied the program to improvement in the labor market but until Wednesday had not defined what that meant.