Fed Members Clarified Bernanke Statement

This week, eight top Fed officials spoke in an effort to clarify the statement of Fed Chairman Bernanke at the post-FOMC decision press conference on June 19th and to reassure panicky investors after the sell off on both equities and bonds’ markets.


The overall tone was to warn markets for misunderstanding the chairman’s message and to emphasize that while tapering of asset purchases will likely begin soon and will only reduces the rate of stimulus addition, interest rates were a separate issue and would remain low for a very long period.


More from Fed members’ speeches:


Fed’s Kocherlakota (dove, FOMC alternate) / Believe it will take another 2 years for US unemployment to drop to 5.5% once it has reached 6.5%. May be appropriate to keep rates near zero even after unemployment falls to 5.5%.


Fed’s Fisher (hawk, FOMC alternate) / Not in favor of ending stimulus immediately; “can’t go from wild turkey to cold turkey.” Exit strategy is still way out in the future. The word ‘exit’ does not work for the Fed now, the exit will be way out in the future.


Fed’s Lacker (hawk, FOMC non-voter) / Low inflation expected to be transitory, markets may have gotten a bit ahead of themselves with respect to tapering response; Not “anywhere near” reducing balance sheet size.


Fed’s Dudley (dove, FOMC voter) / Initial rate hikes are a long way off, could arrive well after 6.5% unemployment level is crossed; economy may diverge significantly from FOMC forecast.


Fed’s Powell (moderate, FOMC voter) / Market expectations for a 2014 rate increase are out of line with the Fed’s view, it is most likely that asset purchases will continue for some time.


Fed’s Lockhart (moderate, FOMC non-voter) / Interest rate increases are likely to come sometime in 2015.


Fed’s Stein (dove, FOMC voter) / The Fed has said nothing that suggests it has plans to change interest rates.


Fed’s Williams (dove, FOMC non-voter) / Cutting bond purchases does not change promise to keep rates low until unemployment falls to 6.5%.


The surge in bond yields that began in early May and accelerated after Bernanke’s June 19th press conference appears to have topped out for the moment after Fed members’ speeches. The yield on the US 10-year hit a nearly two-year high of 2.66% on Monday, but has backed off this level to trade as low as 2.48%.

Analysts note that other bond markets have been even more volatile. For instance the Barclays US Corporate High Yield Index briefly topped 7% early in the week – up from 5% on May 8th.

In the week ended June 26, according to FT, bruised by the first widespread losses for bondholders, investors pulled $8.6bn from US bond funds, contributing to the worst four-week streak since the depths of the financial crisis.