Bernanke signals Fed target rate to stay low after QE

Wiped Out

Bernanke’s testimony to Congress in May that the Fed “could take a step down” in its bond purchases helped push Treasury 10-year yields and 30-year mortgage rates to two-year highs and wiped out more than $5 trillion in market capitalization from global stocks.

The yield on the 10-year Treasury was 2.73% at 9:04 a.m. in New York today, down from a two-year high of 3% in September. The average rate for a 30-year mortgage was 4.35% last week, declining from a two-year high in August, Freddie Mac data show.

U.S. stock-index futures rose after a report today showed retail sales climbed more than forecast in October and investors awaited the release of minutes of the Federal Reserve’s latest policy meeting. Futures on the Standard & Poor’s 500 Index expiring in December rose 0.2% to 1,789.00 at 9:01 a.m. in New York.

Market ‘Surprise’

Bernanke said in his remarks that interest rates rose too high over the summer, due in part to “a perceived reduction in the Fed’s commitment to meeting its objectives.” That increase “was neither welcome nor warranted,” he said.

The Federal Open Market Committee’s decision in September to refrain from slowing its bond buying surprised investors who had forecast the first tapering of the program. The purchases have pumped up the Fed’s balance sheet to a record $3.91 trillion.

Bernanke said that “although the FOMC’s decision came as a surprise to some market participants, it appears to have strengthened the credibility of the committee’s forward rate guidance.” He said the decline in interest rates since September is “more consistent” with that guidance.

The FOMC last month renewed its pledge to press on with bond purchases until the outlook for the labor market has “improved substantially.” The Fed probably won’t taper purchases until its March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8. Unemployment last month was 7.3%.

Yellen Nomination

Bernanke’s term as chairman ends on Jan. 31, and Vice Chairman Janet Yellen has been nominated to succeed him. Bernanke signaled that his views are similar to the ones she expressed in her confirmation hearing on Nov. 14 before the Senate Banking Committee.

“I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery,” he said.

Yellen told lawmakers last week that job-market gains would arise from stronger economic growth, which was running at a 2.8% rate last quarter. Fed officials forecast a 2% to 2.3% expansion for 2013, compared with a 1.7% estimate released yesterday by the Organization for Economic Cooperation and Development.

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