Citi’s FX analyst Steven Englander provides the most detailed, forensic, Kremlinology of Ben Bernanke’s speech last night to figure out what it means for the debate out when the Fed will scale back asset purchases.
The comments by Yellen and Bernanke have to be seen in the context of the key phrase in the last FOMC statement: “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 labour market conditions and inflation moving back toward its longer-run objective.” The word ‘ongoing’ seemed closer to ‘maintaining’ rather than ‘accelerating’ and that was viewed as somewhat hawkish relative to expectations.
Now consider Fed Chairman Bernanke’s speech this evening. The key phrase “When, ultimately, asset purchases do slow, it will likely be because the economy has progressed sufficiently for the Committee to rely more heavily on its rate policies,” is marked as dovish below because it seems to imply that there is a high bar to the beginning of tapering.
Moreover, ‘ultimately’ does not sound like soon, so Bernanke may be trying to echo Yellen for the sake of unity, or it may signal that the beginning of tapering is pushed into the distance. However he does seem to be making a strong case that the Fed’s issue with financial markets was more the market’s advancing of rate hikes, rather than the backing up of rates: “In particular, it appeared that the FOMC’s forward guidance for the federal funds rate had become less effective after June, with market participants pulling forward the time at which they expected the Committee to start raising rates, in a manner inconsistent with the guidance.”
So it sounds as if they are drawing a distinction between a backing up of long-term yields which is ok, and a pushing forward of FOMC hikes which certainly was occurring in August and early September but which is certainly not the case now.