The Federal Reserve's two-day policy meeting concluded Wednesday. At 2 p.m. the Fed said that it will not "taper" its quantitative easing program.
Then, at 2:30 p.m., Chairman Ben Bernanke held a press conference, taking questions from the news media about the newly announced decisions. The press conference has concluded.
Hanging over it all is the likelihood that Bernanke will step down when his term is up Jan. 31, and a tumultuous battle over recent weeks over who will succeed him (right now, vice-chair Janet Yellen looks most likely to get the nod from President Obama).
We'll have the latest news and analysis here as it happens. Don't forget to check out our primer on the Fed, complete with musical interludes.
Bernanke's press conference -- likely his next-to-last one -- has concluded. Unlike at the June meeting, when markets sold off dramatically as the chairman spoke, the reluctance of the Fed to taper has driven stock indexes higher over the course of his comments. See you in December.
Kate Davidson of Politico asked a question that has been on the minds of many Fed watchers in recent weeks. Will the tumultuous debate over whether Janet Yellen, Larry Summers, or someone else ought to be the next Fed chair damage the institution's political independence and credibility in the future?
Not surprisingly, Bernanke's answer is "no."
"I'm not too concerned about the political environment or the future of the Federal Reserve," Bernanke said. "I think the Fed will continue to be an important institution in the United States and will maintain its independence going forward."
What is your biggest regret as you reflect on the five-year anniversary of the Lehman Brothers failure and the financial crisis, asked Annalyn Kurtz of CNN Money.
"On regrets, I have many," Bernanke said. "The biggest regret I have was that we did not forestall the crisis. Once it got going, it was very hard to prevent. We did what we could, given the powers that we had. I would agree with Hank [Paulson] that we were motivated almost entirely by the interests of the broader public , to stabilize the system so it would not bring the economy down, create unemployment and hardship."
"In terms of progress, I think we've made a lot of progress," the chairman continued. "We have the Dodd-Frank law passed in 2010. There are international measures including Basel III and other agreements . . . . Today our large financial firms are better capitalized by far than they were during or even before the crisis."
But there is still much more to be done, he said, such as strengthening derivative markets. "It's going to be some time before all of this stuff that has been undertaken, all of these measures are fully implemented and we can assess the impact on the financial system," Bernanke said.
One debate among Fed watchers has been this: Would the Fed really consider a change in policy, such as starting to taper bond purchases, at a meeting where there was no news conference scheduled? There are eight meetings a year but only four press conferences.
Bernanke suggested that there is nothing stopping the Fed from making a policy move and communicating in detail about it at a meeting without a prescheduled news conference.
"Should anything occur at a meeting without a scheduled press conference, we certainly could arrange a public on-the-record conference call or some other way of answering the media's questions," he said.
Steve Liesman of CNBC asked whether Bernanke has indicated to President Obama that he does not want to serve a third term, whether Obama has indicated that he doesn't want Bernanke for a third four-year term, and whether Bernanke would consider another term.
The Fed chief drew laughs by noting that the answer to all three questions was the same.
He begged off directly answering the question, though, asking the reporters "indulge" him a bit longer and that he hopes to have answers on his plans very soon.
The White House appears to be gearing up to nominate Janet Yellen, the current No. 2 at the Fed, to be its next chairman.
Binyamin Applebaum of the New York Times asked how much Bernanke blames himself and the Fed for the tightening of financial conditions -- read higher interest rates -- in recent months.
Bernanke answered, "I think that communication was very important."
On whether the Fed is changing its plans on when to pull back on bond purchases, Bernanke said: "The general framework in which we're operating is still the same." We have a three-part baseline projection, the chairman said, including growth that's picking up over time, fiscal drag is falling, and continuing gains in the labor market.
"We will be looking to see if the data confirm that basic outlook," Bernanke said. "If it does, we'll take the first step at some point, possibly later this year, and continue so long as the data are consistent with that continued progress."
"Asset purchases are not on a preset course," he added. "They are conditional on the data."
Pedro da Costa of Reuters got the first question at the press conference. He asked Bernanke about the decline in labor force participation, which has made the unemployment rate fall faster than job creation would imply. "How high do you think the jobless rate would be if not for decline in participation, and could you put the labor market in that context?" da Costa asked.
Bernanke said "I think it would be fair to say that most of the improvement of the unemployment rate, not all, is due to job creation, not lower participation." I would also note that if you look at the broader measures of unemployment, including part-time work, discouraged workers, and so on, those have fallen by about the same.
"I think there has been progress . . . but I would agree with you that the unemployment rate, while perhaps the best single indicator, is not by itself a fully representative indicator."
Here's what Bernanke seemed to be trying to get across in the introductory statement to his press conference:
- Yes, the economy has done roughly as well as we expected it to do back in June.
- But interest rates have risen quite a lot since then as financial markets priced in our withdrawal of stimulus, and that in itself may slow growth.
- And fiscal policy has been a big drag on growth, and may become a bigger drag as the looming fiscal showdown approaches.
- That being the case, we think it's best to wait a bit longer to see how the data look in the next couple of months before we slow down our bond purchases.
In his prepared remarks to begin his news conference, Bernanke also mentioned tight fiscal policy as a factor in recent disappointing economic results -- and, implicitly, in the Fed's decision not to pull back on bond purchases.
"Federal fiscal policy continues to be a restraint on growth and a source of downside risk," Bernanke said. The latter point, about downside risk, is likely a reference to the looming showdown over funding the government that could result in a government shutdown.
The announcement that the Fed will not pull back yet on its injections of cash into the economy prompted euphoria on Wall Street. The Standard & Poor's 500 index was up almost a full percentage point 15 minutes after the announcement, on expectations that the continued $85 billion a month in money-printing will help keep stock markets propped up. Here is the graph; the sharp upward spike happened when the Fed announcement crossed wires at 2 p.m.
The same phenomenon pushed interest rates sharply lower. The cost for the U.S. government to borrow money for 10 years fell by 2.76 percent on bond markets, from 2.86 percent before the announcement.
As part of their quarterly projections, Fed officials announce when they expect that tightening policy -- increasing the short-term interest rate -- will be warranted.
Not for a while!
Of the 17 participants in the policy meeting, 12 expected that it will make sense to raise rates in 2015, and another two said in 2016. Only three thought that rate hikes next year, 2014, would make sense. So, unless the officials change their mind or turnover changes the composition of the committee, look for near-zero interest rates through all of next year.
As the table of Fed leaders' projections shows, they are considerably more pessimistic about the outlook than they were just three months ago, at the July policy meeting.
Forget 2013 for a minute. For 2014, Fed officials had expected 3 percent to 3.5 percent growth back in June. Now those projections are bunched much more closely around 3 percent, with 2.9 percent to 3.1 percent representing the "central tendency."
Projections for unemployment are less changed. The Fed officials' inflation projections have been reduced, as well.
After surprising markets by deciding not to begin tapering its $85 billion in bond purchases, what comes next for the Fed? Will it begin slowing the purchases at its October meeting? December?
Here is the closest thing to a hint that this statement contains:
"In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases."
In other words: Don't rush us. We'll taper when we're good and ready.
The Fed made only modest changes to its policy statement, but one of those changes was to mention the possible impact of volatile financial markets.
"The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market," the Federal Open Market Committee said.
While the stock market has been stable-to-rising in recent months, a variety of bond markets have fallen, driving up borrowing costs for home mortgages and corporate borrowers. That could crimp business investment and housing activity in the months ahead.
This is the full statement by the Fed's policy committee Wednesday afternoon:
Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
The Fed's decision not to begin slowing its bond purchases appears to be driven in no small part by the drag that fiscal retrenchment is causing on the economy.
Says key language in the Fed's statement:
"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases"
Translation: We'll be more comfortable slowing our bond-buying program when Congress's actions create less drag on growth.
The Fed elected not to slow the pace of its monthly bond purchases, not taking a much-anticipated move to "taper" its quantitative easing program. After buying $85 billion worth of bonds using newly created money each month for the past year, the Fed will continue doing so.