Stocks, bonds, commodities, and currencies around the world have been going totally crazy ever since Wednesday when Federal Reserve Ben Bernanke suggested that the Fed could begin to taper, or scale back, its stimulative monthly purchases of $85 billion worth of bonds.
However, his statement had a lot of conditions attached to it.
Unfortunately, people have already begun to put words into the Chairman’s mouth. So before any more misinformation is spread, here’s word-for-word exactly what he said before and after he laid out a timeline for the taper (emphasis added to the only part people seem to cite):
…Although the Committee left the pace of purchases unchanged at today’s meeting, it has stated that it may vary the pace of purchases as economic conditions evolve. Any such change will reflect the incoming data and their implications for the outlook, as well as the cumulative progress made toward the Committee’s objectives since the program began in September. Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labour markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 per cent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 per cent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 per cent unemployment rate that prevailed when the Committee announced this program.
I would like to emphasise once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook, as well as on the cumulative progress toward our objectives. If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favourable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labour markets, reductions in the pace of purchases could be delayed; indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.
It’s also worth noting here that, even if a modest reduction in the pace of asset purchases occurs, we would not be shrinking the Federal Reserve’s portfolio of securities but only slowing the pace at which we are adding to the portfolio, while continuing to reinvest principal payments and proceeds from maturing holdings as well. These large and growing holdings will continue to put downward pressure on longer-term interest rates. To use the analogy of driving an automobile, any slowing in the pace of purchases will be a kin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.
I will close by drawing again the important distinction between the Committee’s decisions about adjusting the pace of asset purchases and its forward guidance regarding the target for the federal funds rate. As I mentioned, the current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded. To return to the driving analogy, if the incoming data support the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases. However, any need to consider applying the brakes by raising short-term rates is still far in the future. In any case, no matter how conditions may evolve, the Federal Reserve remains committed to fostering substantial improvement in the outlook for the labour market in a context of price stability.
Perhaps the most important thing he said here was:
…I would like to emphasise once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook…
In other words, any forecasts Bernanke makes is subject to error and revisions.
Here’s a link to the whole transcript:
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