For Feds, Benchmark Rates and Tapering Are Not Tied

November 22, 2013

Fed Says Bond Tapering Not Tied to Benchmark Rate Increase

In a speech to economists in Washington D.C. this week, Federal Reserve Chairman Ben S. Bernanke assured that ending the central bank’s bond buying program will not necessarily signal an immediate increase in the benchmark interest rate, according to a report on the Bloomberg website. The Federal Reserve has a target of 6.5 percent unemployment before it before it tapers.

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after,” Bloomberg quoted Bernanke as saying during the speech.

After four years of a slowly expanding economy, the Federal Reserve seems sensitive to investors’ and buyers’ expectations that the bond buying program is directly tied to a rise in interest rates.

In the meantime, Bernanke said that the labor market has shown what he called “meaningful improvement” since the Fed’s bond buying program began although he admitted that the recent job reports have been “somewhat disappointing.” 

“Policy makers are debating how to slow the pace of asset purchases without causing a surge in interest rates that could jeopardize the more than four-year economic expansion,” Bloomberg reported in the story.

No Mandates Without Credibility For Fed

While speaking to the Illinois Bankers Association, economists report Chicago Fed President Charles Evans said that in order to meet the mandate of increasing inflation from its low of under 2 percent and similarly seeking growth of 2 percent this year the central bank needs to improve its credibility to meet those goals. Without credibility, mandates cannot be met.

Reiterating the Fed’s usual line of thought, Evans said that high accommodation will continue until the economy improves. He said that QE’s benefits have outweighed its costs (reiterating something Janet Yellen said during her hearings in front of Congress last week) and that the Fed will continue until the labor market improves substantially. He predicted that the Fed will not want to sell of its assets, especially Mortgage Backed Securities and will probably let them run out.

He also said that the government shutdown did not have as big of a negative impact as initially thought, meaning the Fed’s tapering decisions will not be as influenced by the next showdown over the budget and fiscal measures in Congress.

Is the Ten-Year Becoming Immune to Tapering?

Patterns of 10-year Treasuries seem to show that the market is becoming less sensitive to a potential tapering of bond buying by the Fed come December, according to economists. A post-Yelln rally matches the slope from September 16 to November 7. If the 10-year bond can trade through 2.65 percent for the next few days it might move back into the old formation, an indication, according to economists, that tapering in the near future will not affect the bond market as much as feared in the past.

Losing buyers of the dips in the market might also push the risk of 2.82 percent to 2.88 percent range into a reality for the second week of December.