The Federal Open Market Committee (FOMC) concluded its two day meeting, released the usual statement plus meeting participants’ economic projections, and Chairman Ben Bernanke held a press conference. Beyond some nuance tweaking of the language, the statement really was the “usual” statement; economic activity expanding at a moderate pace, labor market conditions improving but an elevated unemployment rate, household and business spending advancing, fiscal policy restraining growth, inflation low but expectations stable. Translation: no immediate change in the highly accommodative stance of monetary policy.
The real information came in the press conference. Responding to a surge in longer term interest rates widely attributed to his May 22 economic outlook testimony, Bernanke laid out a timetable for when and how the current asset purchase program (QE3) could be wound down. Bernanke clearly felt compelled to calm investors dumping Treasury securities fearful of being caught off guard by an early end to QE3.
Bernanke explained that based on the projections of the meeting participants and predicated on continuing gains in the labor market, an improving pace of the current moderate economic growth, and inflation moving toward the 2.0 percent target over the coming months, a tapering of QE3 could begin later this year, proceeding gradually with the program ending completely by the middle of next year. Under this scenario, the unemployment rate would be in the vicinity of 7.0 percent when QE3 ended.
Bernanke emphasized that this scenario was a hypothetical “most likely” path if the economic projections proved to be accurate, but he also stressed that QE3 could be extended, expanded or curtailed more rapidly conditional on unfolding economic conditions. Labor market conditions, economic growth and inflation combined will provide clear signals as to whether progress is being made and whether stimulus should be withdrawn or extended.
With this clarification Bernanke hopefully has set the stage for a smoother and more predictable path for the normalization of interest rates as the economy moves forward.