Bernanke makes case for flexible tapering

December 19, 2013 06:12 AM

Federal Reserve Chairman Ben Bernanke reiterated that tapering is not on a preset course and the pace of reductions could be increased or decreased depending on incoming data, during his last post-FOMC press conference. The Chairman further noted that if the economy was to slow markedly, the Fed could halt reductions from one meeting to another. Bernanke noted, however, that his expectation for tapering is a moderate, constant reduction ($10 billion or so) going forward throughout most of 2014.

Bernanke commented that inflation is a big question, nay a concern. A big concern. And while the Fed’s forecast is for a return of inflation to or near the target rate of 2%, if inflation does not show signs of reversing course, "we will take appropriate action."

Bernanke commented that "nothing we did was intended to reduce accommodation. We are still buying at a heightened pace," and intend to keep the Fed Funds rate low well beyond a 6.5% unemployment rate. “We are still building the balance sheet.”

In fact, as a senior bond salesman pointed out, with MBS issuance down nearly 60%, scaling back only $5 billion, monthly MBS purchases of $35 billion are relatively more accommodative today. The Fed is essentially prolonging the tapering timeline with monthly reductions of $10 billion a month rather than $20-$40 billion and shifting the need for further accommodation to an extended low-interest-rate commitment.

The forecast for Fed Funds at the end of 2015 was reduced to 0.75% and to less than 2% in 2016.

Bernanke noted that the transition of power to Yellen was NOT a factor in the decision to initiate tapering now rather than wait until 2014.

About the Author

Lindsey is the Chief Economist for Sterne Agee, specializing in the research and analysis of economic trends and activity, world economies, financial markets and fiscal policies. In addition to more than 10 years of experience, Piegza has published several academic papers in journals such as Harvard Business Review as well as in textbooks published by the Kellogg Graduate School of Management. Often quoted in the business press, Piegza is a regular guest on CNBC and Fox Business as well as national radio and other business news outlets.