Federal Reserve Chairman Ben S. Bernanke is putting investors on notice that the central bank is prepared to begin phasing out one of the most aggressive easing programs in its century-long history later this year.
The Fed will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the world’s largest economy performs in line with Fed projections, Bernanke told reporters yesterday in Washington after a two-day meeting of the Federal Open Market Committee.
“The vast, highly unprecedented, highly accommodative monetary policy stance that’s been so supportive of the recovery has begun to turn,” said Michael Gapen, senior U.S. economist for Barclays Plc in New York and a former economist in the Fed’s Division of Monetary Affairs. “The markets for the next several years or more will have to deal with the withdrawal of that support.”
Stocks and Treasuries tumbled at the prospect of a wind-down in bond buying that’s swollen the Fed balance sheet to a record $3.41 trillion in an attack against the worst joblessness since the Great Depression. While citing waning risks to the economy, Bernanke said curbs to bond buying hinge on gains in the labor market and a pickup in growth.
The yield on the benchmark 10-year Treasury note rose 3 basis points, or 0.03 percentage point, to 2.39 percent at 10:11 a.m. New York time after earlier climbing as high as 2.47 percent, the highest since August 2011. The yield jumped 17 basis points yesterday, the most since October 2011.
Yields Surge
Bonds across the Asia-Pacific region fell, with Japan’s 10-year yield climbing 4 basis points to 0.86 percent. The yield on 10-year German bunds rose 9 basis points to 1.65 percent. The MSCI Asia Pacific Index of shares slumped 3.9 percent and the Stoxx Europe 600 Index slid 2.6 percent. The Standard & Poor’s 500 Index fell 1.4 percent. Gold fell below $1,300 an ounce to the lowest in since September 2010.
The conclusion to record stimulus may take years to complete as the Fed’s forecasts showed most officials don’t expect to begin raising the benchmark lending rate out of its lowest-ever range of zero to 0.25 percent until 2015. Bernanke, 59, whose second term as chairman ends on Jan. 31, warned investors against viewing the policy makers’ plans as inflexible, saying their decisions are not “deterministic.”
Labor Market
“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,” Bernanke said, referring to the FOMC’s outlook for “moderate” economic growth, further labor-market gains and inflation accelerating toward the Fed’s 2 percent goal.