Bernanke says Fed on course to end asset buying in mid-2014

Federal Reserve Chairman Ben Bernanke (Source: Bloomberg) Federal Reserve Chairman Ben Bernanke (Source: Bloomberg)

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in mid-2014 if the economy continues to improve as the central bank forecasts.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said today in a press conference in Washington. “If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Bernanke spoke after the Federal Open Market Committee said today it would maintain the $85 billion pace of monthly asset purchases and that it sees the “downside risks to the outlook for the economy and the labor market as having diminished since the fall.” The FOMC repeated that it’s prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation.

Bernanke is expanding the Fed’s balance sheet toward $4 trillion as he seeks to reduce a jobless rate that stands at 7.6% after four years of economic growth. Concern that the Fed is closer to reducing the pace of asset purchases, also known as quantitative easing, pushed 10-year Treasury yields to the highest since March 2012.

Stocks extended losses after his remarks. The Standard & Poor’s 500 Index declined 1.3% at 3:57 p.m. in New York. The yield on the 10-year Treasury note rose to 2.34% from 2.19% late yesterday.

Downside Risks

“The Fed is out of the closet,” said Ward McCarthy, chief financial economist at Jefferies Group LLC in New York and a former Richmond Fed economist. “They expect to end these QE purchases. Bernanke wasn’t more specific than later this year, but connecting all the dots suggests he is thinking in the fourth quarter.’’

Bernanke stressed that the Fed has “no deterministic or fixed plan” to end asset purchases.

“If you draw the conclusion that I just said that our policies -- that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” he said. “If the economy does not improve along the lines that we expect, we will provide additional support.”

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