The Fed chairman’s message was a “blockbuster,” said Stephen Oliner, a member of the Fed’s forecasting division from 1984 until 2011.
“He was very aware that he has an extremely difficult communication job ahead of him because there are so many moving parts to monetary policy,” said Oliner, resident scholar at the American Enterprise Institute in Washington, a non-profit group that advocates free markets.
Policy makers “are going to really try to be sure that the market is pretty well aligned with their thinking every time they communicate,” he said.
Reducing stimulus and winding down the balance sheet without roiling markets is one of the biggest challenges Bernanke’s successor would face, should the chairman not serve a third, four-year term. President Barack Obama said this week that Bernanke has stayed in his post “longer than he wanted,” one of his clearest signals yet the Fed chief will leave.
Speculation the Fed will reduce purchases has lifted mortgage rates and government bond yields since May 22, when Bernanke told U.S. lawmakers the FOMC “could” reduce buying within “the next few meetings” if policy makers see evidence of labor-market gains that can be sustained.
Mortgage rates have posted six straight weekly gains that pushed home borrowing costs up 19% for the biggest increase in a decade. 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. The yield on the 10- year Treasury has jumped from a record low 1.38% in July.
Bernanke said Treasury yields have climbed in part because of optimism about the economy, and higher borrowing costs are offset by conditions such as increasing house prices. The S&P/Case Shiller index of property values in 20 cities rose 10.9% in March for the biggest annual gain since 2006.
“One important difference now is that people are more optimistic about housing” and expect prices to continue rising, he said. That gain “compensates to some extent for a slightly higher mortgage rate.”