Fed ‘not done’ talking down yields


U.S. Federal Reserve chairman Ben Bernanke’s testimony to the U.S. House of Representatives Financial Services Committee on Wednesday affirmed his dovish stance.

His comments continued to indicate there is no preset course for quantitative easing, which may be decreased or even increased depending on the data, particularly on employment.

Mr. Bernanke also reiterated interest rates will likely remain low long after QE ends, even if the Fed’s targets are reached, and that the end of asset purchases by the central bank doesn’t mean the beginning of sales.

“The Fed is not done talking down yields. Whether this is necessary is debatable,” Jimmy Jean, economic strategist at Desjardins Capital Markets, told clients. “Nonetheless, the Fed does not want to take the risk of stifling the recovery. The clear message to markets is: ‘if the data flags, don’t second-guess us.'”

Scotiabank economist Derek Holt said Mr. Bernanke’s latest comments are probably the clearest explanation to date that the Fed remains committed to stimulus for a long time, both through maintaining the purchase of both treasuries and mortgage-backed securities, and reinforcing a long pause for the fed funds target.

“The Fed tends to choose its wording for policy signals carefully and to us ‘later this year’ does not mean two weeks from now so it’s extremely unlikely that the Fed is contemplating tapering at the July 31st FOMC and that’s why no one across the primary dealers including Scotiabank expects this,” Mr. Holt said in a research note.

“It’s also unlikely that ‘later this year’ signals tapered asset purchases just eight weeks from now at the September FOMC. Thus, changing the time period reference from ‘later’ to something more imminent is the first language signal we should be watching from the Fed and they’re clearly not there yet even with Bernanke’s refreshed take offered today,” he added.

While Mr. Bernanke said nothing new, the market reacted positively to the line that asset purchases could continue until substantial improvement in the labor market is seen.

The Fed chairman has said this before, but Steven Ricchiuto, chief economist at Mizuho Securities USA, believes investors now appear more willing to put their money to work at current yield levels.

He thinks this change is likely the result of softer economic data, such as Wednesday’s report on U.S. housing starts. The economist said the report shows housing looks to have topped out around 10% year-over-year and is more sensitive to rising rates than to the level of rates than the growth bulls thought.

Housing starts declined by 9.9% in June and permits fell 7.5%, marking the second straight decline in permits and the first decline in single-family starts in months.

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