Speculation that an improving economy will prompt Fed policy makers to reduce bond buying last month triggered the biggest jump in 10-year Treasury yields since December 2010.
About $2 trillion has been erased from the value of global equities since Bernanke told U.S. lawmakers on May 22 that the FOMC “could” consider reducing bond purchases within “the next few meetings” if officials see signs of improvement in the labor market and are convinced the gains can be sustained.
Mortgage rates have soared the most in a decade on speculation the Fed’s purchases may slow. The interest rate on a 30-year fixed home loan climbed to a 14-month high of 3.98% last week, according to data compiled by Freddie Mac.
Investors may be over-reacting to the prospect of a reduction in the pace of bond purchases, Nathan Sheets, the former head of the Fed’s international finance division, said before the Fed announcement.
“Tapering is not a reduction in stimulus,” said Sheets, now the global head of international economics at Citigroup Inc. in New York. “The Fed will still be buying, still removing duration from the market.”
Bernanke is nearing the end of his second four-year term, a period marked by unprecedented measures to battle the deepest recession since the 1930s and then to keep the economy growing at a pace that’s brisk enough to put millions of unemployed Americans back to work.
The former Princeton professor cut the Fed’s target interest rate almost to zero in December 2008 and has led the central bank in three rounds of large-scale asset purchases that have swelled the Fed’s balance sheet to a record $3.41 trillion.