BERNANKE DEFINES TIMELINE FOR EASING OF QE

By Ruma Dubey

Ben Bernanke’s much anticipated Federal Open Market Committee (FOMC) policy statement on Wednesday was a non event as there he talked only about keeping QE3 intact. So for now,  QE remains, the stimulus remains. This was very much as expected.

It was only later after the policy statement was issued that Bernanke at the Press Conference said that Fed may "moderate" its pace of bond buying later this year and may end QE by around middle of 2014. This spooked the US makets which fell post the FOMC meet.

The Fed has essentially tried to balance the markets while at the same time tried to prepare it for the tapering which will start before end of 2013. By defining a timeline, it has tried to comfort the markets, that it is not going to do anything dramatic and sudden which will be disruptive.

All the action was post the policy statement, at the Press Conference. The other big question was about his retirement- he is due to end his second term by January 2014 and he has made it pretty clear that he does not want another term. But when questioned about it, he said, “I don't have anything for you on my personal plans.”

Well, most knew that easing of QE was not going to happen immediately; almost everybody had expected it to start only by the end of the year.  At this FOMC meet, expectation was about how much and when the easing would happen and that uncertainty to some extent has now been removed. Bernnake, by defining the timeline has given time to all a lot of time to ponder and prepare for life without stimulus while at the same time, waiting for the US economy to get stronger , strong enough to dispense with the crutches of QE for support and start walking on its own feet. By then, which will be the second half of 2013, even Europe would, hopefully, have started showing some signs of recovery.

Bernanke’s statements at this FOMC have been pretty optimistic, not dark and gloomy like the one last year. A quick look at the highlights of the policy statements:

• 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
• Upgraded assessment of the US economy
• Remained silent about when it would start easing QE, keeping uncertainty intact to that extent
• Labor market conditions have shown further improvement in recent months
• Unemployment remains "elevated."
• Downside risks to the outlook for the economy and the labor market have diminished since last fall
• Expect to keep short-term interest rates low until 2015 at 0% to 0.25%
• Revised optimistic projections – Expects unemployment at 6.5% to 6.8% by end of 2014 v/s earlier forecast of 6.8% to 7.3%

So does this mean that the moment unemployment hits 6.5% easing of QE will begin or interest rates will be hiked? Well Bernanke said that 6.5% is not a trigger but a threshold for interest rate tightening. But at the same time, at the Press Conference, Bernanke said that FOMC might lower unemployment threshold. This means the Fed as of now has a broad outlook but no fixed plan as such.

Well, the indication we have as of now is – right now there is no easing of QE but we could see some announcement to this effect when the Fed meets in October and easing will happen if the US economy continues to improve – that’s the prerequisite for easing.  One of the preconditions for the Fed's policy path is that inflation starts to move toward its 2% objective.