Wednesday, April 27, 2011

A few takeaways from Bernanke Press Briefing

by Bill McBride on 4/27/2011 06:04:00 PM

First, there were no surprises.

• Here is the video of the press conference (about 57 minutes).

• Bernanke commented that "extended period" probably implies that the Fed would not raise rates for a "couple of meetings" after the "extended period" language is removed from the FOMC statement. Back in 2003/2004, the Fed raised rates in June 2004, about six months after the last appearance of the "considerable period" language in December 2003.

• Bernanke discussed the "stock" versus "flow" view of the QE2 purchases, and he said the Fed does not expect any significant impact on markets when QE2 ends in June (we already knew this was the Fed's view). Bernanke also said the program would not be tapered off, but would just end.

• When asked if the Fed could do more about unemployment, Bernanke responded: "Going forward we'll have to continue to make judgments about whether additional steps are warranted. But as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate. And, as I was indicating earlier, I think that even purely from an employment perspective that if inflation were to become unmoored - inflation expectations were to rise significantly - that the cost of that in terms of employment loss in the future if we had to respond to that would be quite significant." This sounds like QE3 is unlikely unless the economy slows sharply (or inflation falls).

• Bernanke noted that an early exit step would be to stop reinvesting maturing securities. This suggests that the Fed will continue to reinvest maturing securities after QE2 ends in June. This is exactly what I've been expecting (from FOMC preview):

This suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 2+ months later.
• Drop extended period language a couple months later
• Raise rates in early to mid-2012.

That is probably the earliest the Fed would raise rates - and it could be much later.
• And here are the updated forecasts. The GDP forecast is lower, inflation is higher and the unemployment rate lower:

April 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP3.1 to 3.33.5 to 4.23.5 to 4.3
Previous Projection (Jan 2011)3.4 to 3.93.5 to 4.43.7 to 4.6
Unemployment Rate 8.4 to 8.77.6 to 7.96.8 to 7.2
Previous Projection (Jan 2011)8.8 to 9.07.6 to 8.16.8 to 7.2
PCE Inflaton2.1 to 2.81.2 to 2.01.4 to 2.0
Previous Projection (Jan 2011)1.3 to 1.71.0 to 1.91.2 to 2.0
Core PCE Inflation1.3 to 1.61.3 to 1.81.4 to 2.0
Previous Projection (Jan 2011)1.0 to 1.31.0 to 1.51.2 to 2.0

FOMC definitions:
1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Q1 2011: Homeownership Rate at 1998 Levels