Chairman Bernanke’s testimony yesterday was yet another attempt to calm financial markets, which have been spooked by the prospect of the wind-down of the QE program. His message on QE was the same as it has been for weeks. First, if the economy evolves as the Fed projects, tapering would begin later this year and the QE purchases would end around the middle of next year. Second, the timetable is entirely data-dependent. This is an important part of the message. If the economy is weaker than the Fed projects, the QE program will stay in place for longer than indicated by the tentative timetable. Markets have been volatile, in large part, because investors initially didn’t hear the second part of the message and only now seem to be grasping what Bernanke has been trying to say for weeks.
Bernanke’s other central point, repeated again yesterday, is that the Fed intends to keep monetary policy highly accommodative for a long time after the QE purchases come to an end. He indicated again that the first increase in the federal funds rate could come well after the unemployment rate reaches 6.5%, the threshold level identified by the FOMC. In essence, the Fed is trying to tell the market that it’s pivoting to a more conventional mix of policy instruments — less use of asset purchases and greater reliance on the federal funds rate. The challenge has been to make the market understand that this change in mix does not constitute a policy tightening.
Now that Bernanke has had some success in conveying this message, it might be best to just stop talking. Any changes to the QE program later this year will be determined by what the Fed learns about the economy between now and then. Nothing more can be revealed now that will clarify the situation. The market craves certainty about the future, but Bernanke can’t provide that. The Fed can only wait for more data and then act on the game plan it has laid out.