Jul 18, 2013

    US Fed still committed to tapering

    FEDERAL Reserve chairman Ben Bernanke said yesterday that the United States central bank still expects to start scaling back its massive asset-purchase programme later this year, but left open the option of tweaking that plan if the economic outlook changed.

    While sticking closely to a timeline he first outlined last month - that the Fed would halt bond buying by the middle of next year, when unemployment was projected to be around 7 per cent - Mr Bernanke went out of his way to stress that nothing was set in stone.

    His remarks led to US benchmark 10-year Treasury yields falling to below 2.5 per cent, the lowest level in two weeks.

    "If the outlook for employment were to become relatively less favourable...or if financial conditions - which have tightened recently - were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer," the 59-year-old Fed chairman said in prepared testimony before the House Financial Services Committee.

    Policymakers, including Mr Bernanke, have tried to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying.

    "The Fed's bifurcated message will continue," said Mr Michael Gapen, senior United States economist at Barclays in New York and a former Fed economist, before the testimony. "Their outlook is for an environment where we can start tapering - so a hawkish tone on tapering, switching to a dovish tone on rate hikes."

    Investors in federal-funds futures are starting to absorb Mr Bernanke's message. They see a 44 per cent chance that the central bank will raise interest rates from close to zero before the end of next year, according to data compiled by Bloomberg.

    That is down from 53 per cent last Wednesday, the day before the Fed chairman said "highly accommodative monetary policy for the foreseeable future is what's needed in the US economy".

    Said Mr Jack Ablin, chief investment officer at BMO Private Bank in Chicago: "There is a little more clarity about his plan. It's probably a fair assessment of the situation and it's probably what the average investor expected. This is probably the most clarity the chairman has offered in a while.

    "We had a few communication mishaps earlier in the summer, and my view is that he just wanted to eliminate all doubt. Clarity is good."