Federal Reserve officials stepped up their campaign to stem an increase in long-term borrowing costs that threatens to blunt the U.S. expansion and sought to clarify comments by Chairman Ben S. Bernanke that sparked turmoil in global financial markets.
William C. Dudley, president of the Federal Reserve Bank of New York, said any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.
Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61% this week from as low as 1.63% in May. The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee, along with Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart sought to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.
“Such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.
The Standard & Poor’s 500 Index climbed 0.7% to 1,613.95 at 3:04 p.m. in New York, while the yield on the 10- year Treasury note fell to 2.48% from 2.54% late yesterday.
“It is pretty obvious that the Fed was caught off guard by the market’s reaction given the lengths to which they have gone to reshape market expectations,” Drew Matus, deputy U.S. chief economist at UBS Securities LLC in Stamford, Connecticut, and a former analyst at the New York Fed, said in an e-mail. “The range of both speakers and outlets suggests that these comments are, if not coordinated, then at least part of a collective -- likely futile -- effort to re-mold the market’s view of the June FOMC press conference.”
Mortgage rates for 30-year loans surged to the highest level in almost two years, increasing borrowing costs at a time when the housing market is strengthening. The average rate for a 30-year fixed mortgage rose to 4.46% from 3.93%, the biggest one-week increase since 1987, McLean, Virginia-based Freddie Mac said in a statement. The rate was the highest since July 2011 and above 4% for the first time since March 2012.