As chairman of the U.S. Federal Reserve, Ben Bernanke’s public statements have the ability to move markets. We saw this earlier in June at the conclusion of the most recent policy meeting, when major indices jumped erratically before turning decidedly negative in the wake of a press conference held by the chairman.
As the man behind America’s monetary policy, markets have turned to Bernanke’s comments for clues about the future of quantitative easing and, ultimately, a return to more normal benchmark interest rates.
In many ways, Bernanke’s unconventional monetary policy has defined the post-crisis era. The U.S. economy has moved forward seemingly on the coattails of low interest rates, which have ostensibly helped fuel everything from the healing of the housing market to increased consumer to rising equity prices. Caution is still the name of the game for many businesses and investors, but economists across the board have painted a generally positive picture of America’s economic future.
On Wednesday, Bernanke will speak at the National Bureau of Economic Research Conference in Cambridge, Massachusetts. He will speak shortly after the minutes from the June 18-19 policy meeting are released, and — according to the Fed’s schedule — primarily address three things: the Fed’s policy record, lessons learned from the first 100 years of central banking in the U.S., and prospects for the future.
It’s not worth spending too much time speculating on the picture Bernanke will paint, but based on previous statements it seems fair to say that Bernanke will issue a positive thesis for the U.S. economy and the Fed’s role in the ongoing recovery. In his last testimony before Congress, Bernanke suggested that monetary policy has been a critical tailwind, helping counteract many fundamental and fiscal headwinds in the financial and labor markets.
Bernanke hasn’t necessarily been quick to highlight where the Fed has failed to perform well in the past, but he also hasn’t buried the truth. The Fed’s track record on inflation, for example, isn’t perfect, but the chairman has argued that it’s getting better. Bernanke seems likely to describe a Federal Reserve that is becoming more skilled with the monetary tools at its disposal despite the controversy surrounding QE, the Fed’s balance sheet, and the dubious fate awaiting equity markets once tapering begins.
With speculation in tow, let’s take a look at where we are and where the Fed thinks we’re going. Here are projections from the most recent policy meeting, which should help contextualize Bernanke’s upcoming speech.
Gross Domestic Product
Real GDP is expected to increase between 2.3 and 2.6 percent this year and accelerate through 2014. The longer run trend is slightly weaker — between 2.3 and 2.5 percent — but reflects what seems like more reasonable growth expectations. Given current conditions, it would take a miracle to sustain 3 percent or higher economic growth in the long term.
Par for the course, Bernanke said fiscal policy has a substantial headwind to overall economic growth: “Going forward, the economic outcomes that the [Federal Open Market Committee] sees as most likely involve continuing gains in labor 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.”
Unemployment expectations are still underwhelming, with forecasts showing near-full employment — currently ballparked at between 5 and 6 percent — only in the longer run. In his opening statement at a June 19 press conference, Bernanke commented that private payrolls were increasing at an average of about 200,000 per month.
“However, at 7.6 percent, the unemployment rate remains elevated, as do rates of underemployment and long-term unemployment,” Bernanke said. “Overall, the committee believes the downside risks to the outlook for the economy and the labor market have diminished since the fall, but we will continue to evaluate economic conditions and risks as they evolve.”
These comments were made before Friday’s employment situation report, which showed an addition of 195,000 to payrolls in June while the unemployment rate remained flat at 7.6 percent.
Fed board members are looking for personal consumption expenditure inflation to trend between 0.8 and 1.2 percent in 2013 before picking up steam. In 2014, expectations land in a range between 1.4 and 2 percent, the upper bound being the bank’s long-term target. To recap, the Fed set a 2.5 percent “threshold” (emphasis apparently necessary after Bernanke’s last press conference) as a criteria for a shift in interest rate guidance.
Bernanke said: “As I have noted frequently, the phrase ‘at least as long’ in the committee’s interest rate guidance is important: the economic conditions we have set out as preceding any future rate increase are thresholds, not triggers. For example, assuming that inflation is near our objective at that time, as expected, a decline in the unemployment rate to 6.5 percent would not lead automatically to an increase in the federal funds rate target, but rather would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase.”
When will policy firm up?
“In the projections submitted for this meeting, fourteen of nineteen [Federal Open Market Committee] participants indicated that they expect the first increase in the target for the federal funds rate to occur in 2015, and one expected the first increase to occur in 2016,” Bernanke said.
To be clear, this is not the Fed setting a change in policy in stone. Bernanke repeatedly highlighted that any change in policy — open market or otherwise — will be dependent on economic conditions. This forecast is simply the aggregate of individual board member opinions.
In regard to asset purchases, Bernanke said: “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.”
What is the appropriate pace at which to firm up policy?
One of the most important things to take away from Wednesday’s press conference — and, in fact, one of the most important things to understand about Fed policy in general right now — is that the Fed expects to make changes to both open-market operations and its target funds rate slowly. It’s unclear what the tapering of purchases will look like, but Federal Open Market Committee members provided expectations for the funds rate.
It’s also important to point out that the Fed doesn’t intend to change the target funds rate until asset purchases end.