March 26 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may be hesitating to extol the improving economy -- in part to preserve the central bank’s own reputation.
While Fed policy makers upgraded their assessment of the outlook at their March 13 meeting after the most-robust six- month period of job growth since 2006, they reiterated their plan to keep interest rates near zero until at least late 2014, citing still “elevated” unemployment and “significant downside risks.” Bernanke said today that continued accommodative policy will be needed to make further progress.
Bernanke’s caution is “appropriate,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. The Fed chairman risks damaging his credibility by being too optimistic so soon after adopting the 2014 pledge in January and before having conviction about the economy’s momentum, Hooper said. Policy makers fueled speculation in 2011 that monetary tightening was coming by laying out their exit strategy, and they don’t want to guide the market prematurely again, he added.
“They were not at all discouraging some talk about the exit” a year ago, Hooper said in an interview from his New York office. “They’re not going to make that mistake twice. Bernanke is going to be very patient.”
Yields on benchmark 10-year Treasury notes were 2.26% at 10:28 a.m. in New York, up from 1.8% Jan. 31, according to Bloomberg Bond Trader prices, as manufacturing data improved and jobless claims dropped. The yield had climbed to 3.74% in February 2011 as policy makers outlined how they planned to withdraw their record stimulus.
Even though the recent increase reflects signs of strength in the economy, Fed officials probably won’t welcome the rising yields after the unprecedented steps they’ve taken to reduce rates, according to Ward McCarthy, chief financial economist at Jefferies & Co. in New York.
“They don’t like it,” he said. “They have expanded their balance sheet quite substantially to keep rates low.”
In addition to pushing out expectations for higher borrowing costs, U.S. central bankers have kept their benchmark rate between zero and 0.25% since December 2008 and bought $2.3 trillion of bonds in two rounds of asset purchases. They’re also pursuing a maturity-extension program announced in September to replace $400 billion of short-term debt in the Fed’s portfolio with longer-term securities. The so-called Operation Twist is scheduled to be completed in June.
Rising bond yields are “a reflection of a stronger economy,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a Bloomberg Television interview last week. “Low yields might sound good, but” they can “represent a lot of pessimism.”
Bullard, who doesn’t vote on the policy-setting Federal Open Market Committee this year, said U.S. monetary policy “may be at a turning point,” and the Fed’s first interest-rate increase since the global financial crisis may come as soon as late 2013.
Federal Reserve Bank of New York President William C. Dudley offered a more cautious view on March 19, saying signs the economy is improving don’t dispel risks to growth that include higher gasoline prices, fiscal cutbacks and a weak housing market.
The data have been “a bit more upbeat of late,” Dudley said in Melville, New York. “But while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.”
Declining Labor Participation
About half the drop in unemployment since September “was due to a declining labor-force participation rate,” said Dudley, who is also vice chairman of the FOMC. Had participation not decreased “from around 66 percent in mid-2008 to under 64 percent in February, the unemployment rate would still be over 10 percent.”
Joblessness has fallen to 8.3 percent, the lowest in three years, from 9.4 percent at the end of 2010 and a high of 10 percent in October 2009.
“A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed,” Bernanke said today to the National Association for Business Economics in Arlington, Virginia. “Still, conditions remain far from normal, as shown, for example, by the high level of long- term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.”