Fed monetary course hard to undo for Bernanke successor

Dialing Down

Bernanke told a news conference on June 19 that the central bank may start dialing down its unprecedented bond-buying program this year and end it entirely in mid-2014, provided that growth quickens and inflation moves up closer to the Fed’s 2 percent target. The central bank currently is purchasing $85 billion of assets per month, comprising $40 billion of mortgage- backed securities and $45 billion of longer-term Treasury debt.

Policy makers forecast that growth will pick up to 3 percent to 3.5 percent next year, from 2.3 percent to 2.6 percent this year, according to their central tendency estimates, which exclude the three highest and three lowest projections. Inflation -- as measured by the personal consumption expenditure price index -- will speed up to 1.4 percent to 2 percent, from 0.8 percent to 1.2 percent this year.

Zero Rates

Bernanke said the FOMC expects a “considerable interval” between the ending of asset purchases and the first interest- rate increase. He reiterated that the central bank intends to keep short-term rates near zero at least as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Joblessness was 7.6 percent in May, and inflation was 0.7 percent in April.

A “very strong majority of FOMC participants still expect rates to be quite low at the end of 2015,” Bernanke said.

A strong majority also doesn’t expect the committee to sell any of the mortgage-backed securities it has on its balance sheet, he added.

Once a policy has been spelled out, it’s always harder to change course, said Robert Eisenbeis, a former director of research at the Atlanta Fed.

“It’s still a committee, and what one chairman can do depends on their ability to manage the committee,” added Eisenbeis, now vice chairman and chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “It’s like trying to move a glacier. It’s very hard for someone to come in and change course unless they’re a very skillful politician.”


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