Big Ben Sticks to Script

After the Fed left the policy unchanged and only made a small acknowledgement to the economic improvement, Ben Bernanke met the press to discuss the current situation. He didn’t provide any interesting numbers but has admitted that the number of people not counted as unemployment has risen.

Live blog of the event.

Highlights

• Employment picking up
• Fiscal policy is somewhat more restrictive.
• Risks in QE are manageable (responding to criticism).
• Rate guidance is guidance, not a commitment.
• There will be a gap between the sustained improvement and removal of monetary stimulus.
• There has been improvement – we want to make sure it is sustainable.
• The number of people not counted as unemployed has actually gone up.
• Bernake and Obama spoke about Bernanke’s future.

Live blog

• 18:23 Press conference begins at 18:30 GMT. All times are GMT
• 18:24 USD/JPY reacted to the announcement by advancing above 96 EUR/USD made modest gains.
• 18:25 If Bernanke surprises with a hawkish statment, the dollar will rise, gold will fall and stocks will fall. Yet this isn’t likely.
• 18:27 Bernanke is expected to remain close to the statement’s line. It will be interesting to hear his comments about the labor market: participation rate, employment to population ratio, etc.
• 18:29 The market’s focus is on Cyprus. Here are the latest updates on the situation.
• 18:30 Press conference begins.
• 18:30 Data dconsistent with expectations. Economy improving, especially unemployment. However, 7.7% is elevated.
• 18:31 Fiscal policy is restrictive. Blaming the sequester?
• 18:32 Fed aware of risks in the current policy, and this is manageable.
• 18:33 Bernanke explains the open ended nature of the current QE3 and QE4 program. No adjustment was warranted.
• 18:34 This is guidance, not a commitment.
• 18:36 2015 or 2016 are the prefered years for lifting the rates.
• 18:37 Self sustained recovery is needed.
• 18:38 It will take time between a recovery and the removal of loose policy. Quite dovish.
• 18:39 Questions begin
• 18:40 Payrolls, unemployment rate, participation rate, range of indicators need to improve.
• 18:42 Also growth is eyed, in order to monitor the bigger picture.
• 18:43 We don’t want an “all or nothing” criteria. Makes more sense to have a continuous, sensitive response rather than on/off.
• 18:43 Changes in policy will not be too frequent.
• 18:43 What is “substantial imrpovement” – Bernanke doesn’t provide numbers. We might reduce stimulus if the conditions improve, or re-add stimulus if needed.
• 18:44 We will decide in due time, using models and indicators – very opaque words.
• 18:45 We want the markets to understand what is happening.
• 18:45 There has been improvement.
• 18:46 Question about Cyprus, after the Fed removed the comment about improving global financial conditions.
• 18:46 About Cyprus: difficult situation, political stress, big banking sector – Bernanke isn’t saying anything we don’t know. It does have conseuquences, but despite the fail of the vote, markets are up.
• 18:47 CDS do indicate a possibility of failure of big institutions.
• 18:48 Too big to fail issues haven’t been fully resolved.
• 18:49 Question about term limits: Bernanke doesn’t say anything. Term limits are redundant. However, this is up to the politicians.
• 18:51 When have you talked to someone who is unemployment? Bernanke answers emotionally.
• 18:53 Long term unemployment causes a loss of skills.
• 18:54 We are making progress interms of guidance -more transparency now.
• 18:55 Question about “too big to fail” – one proposal not in effect yet is surcharges on big banks than smaller banks. This will make them safer.
• 18:56 Liquidity regulation helps.
• 18:47 Some tightening of the mortgage market went too far after too easy conditions.
• 18:58 Excessive tightening has an impact on monetary policy.
• 18:59 The number of people underwater is declining thanks to the rise in home prices.
• 19:00 We’re not targeting stock prices. What we see is not different from historic action. It is not surprising that stocks are higher when the economy is improving. While the Dow Jones is high in nominal levels, it isn’t that high in real levels.
• 19:02 Putting together all the fiscal measures, the Federal fiscal restraint is cutting 1.5% points off of growth. This is significant for us.
• 19:03 Fiscal restraint is part of the considerations of monetary policy.
• 19:04 Bernanke would like to see less front loading of debt reduction.
• 19:05 Employment and growth haven’t gone hand in hand as expected.
• 19:06 One or two months aren’t enough to convince. We need more data.
• 19:08 Too big to fail – the severely adverse scenario is the really important one.
• 19:09 Question: what else could the Fed do? Perhaps different thresholds, but the current numbers are “as good as we can get” with the current firepower.
• 19:11 An inflation target of 2% is a good balance betwenn strong inflation and a danger of deflation.
• 19:12 The financial sector rose from 5% to 9% from 1980 to today. Bernanke says that the world has become more global.
• 19:14 Technology is a cause for a larger financial sector.
• 19:15 On Cyrpus: It’s a very tough issue and it’s hard to find resources. We’re going to keep monitoring the sitautaion.
• 19:17 Seasonals have been somewhat distorted due to the severity of the recession.
• 19:18 Europeans are saying that Cyprus is unique, and the banking sector is indeed unusual there.
• 19:19 Cypriot situation not similar to the US, thanks to the FDIC.
• 19:20 Long term unemployment is one dimension of the unemployment problem.
• 19:21 Women participation is slightly declining, and attachment is lower.
• 19:22 The number of people not counted as unemployed has actually gone up.
• 19:23 USD/JPY stalling above 96, and EUR/USD stable around 1.2950.
• 19:24 If the economy is an a weak condition, it is hard to lift the rates, even though there is concern about a bubble. All central banks are learning.
• 19:25 Bernanke spoke to Obama about Bernanke’s future, but there is no news now.
• 19:26 Dozens of PHD economists working at the Fed, and there is no single person making the policy.
• 19:27 Press conference adds.

Background

The Fed maintains an open ended QE policy worth $85 billion per month. It awaits a substantial improvement in the labor market before removing the accommodative policy.

Further reading: Risk-on/Risk-off dynamic of FX markets is all but dead

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