Fed taper message succeeds as bonds adjust to economic data

After misleading investors with a time line for tapering its unprecedented stimulus, the Federal Reserve now is stressing that any reduction in bond purchases will depend on the economic outlook -- and the message is sinking in.

Officials surprised traders and roiled markets across the globe on Sept. 18 by maintaining their $85 billion in monthly asset purchases. Investors had clung to Chairman Ben S. Bernanke’s May guidance that he might taper “in the next few meetings” of the policy-making Federal Open Market Committee, ignoring the weakest back-to-back months for payroll gains in a year and a jobless rate that was falling partly because workers were leaving the labor force.

The Fed since then has emphasized that changes are “not on a preset course” and hinge on the economy. The result: When unemployment dropped to a five-year low of 7 percent in November, the odds doubled that the central bank would begin tapering its bond buying this week, a Bloomberg survey showed.

“A lot of people, including myself, are now looking at the data and saying, ‘Okay, if that’s the way they want to go,’” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. Before September, “all of this talk about tapering without the context of the numbers threw the market off.”

‘Unprecedented Circumstances’

Fed Vice Chairman Janet Yellen, the nominee to replace Bernanke as chairman, told the Senate Banking Committee Nov. 14 that communications are “challenging” because the central bank is in “unprecedented circumstances.”

“So, it is a work in progress, and sometimes miscommunication is possible,” she said at her confirmation hearing in Washington.

The Fed’s unexpected decision on Sept. 18 to refrain from changing its policy sent stocks to record highs and triggered the biggest rally in Treasuries since 2011. The yield on the benchmark 10-year note fell 16 basis points, or 0.16 percent, that day to 2.69 percent and continued to drop, reaching 2.5 percent on Oct. 23, according to Bloomberg Bond Trader prices.

With recent data showing continued improvement in the U.S. economy, yields have climbed, hitting 2.88 percent on Dec. 12 after a larger-than-forecast jump in U.S. retail sales for November. This followed a Dec. 6 Labor Department report that payrolls swelled by 203,000 after a revised 200,000 increase in October. The November gain exceeded the 185,000 median forecast of 89 economists surveyed by Bloomberg.

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