Across the worlds of Wall Street and Washington, all eyes will be on Ben Bernanke Wednesday, as the Federal Reserve chairman wraps up a two-day policy meeting and then steps in front of reporters to address the questions everyone wants answered: When exactly will the fed start tapering its bond-buying? Will Bernanke definitely be leaving his post when his term expires at the end of January? Despite a recent spike in interest rates, Wall Street economists largely forecast that the tapering won’t start until September or later. Here are what 10 analysts expect from Bernanke, based on their recent research reports:
Ed Yardeni, President and Chief Investment Strategist at Yardeni Research, Inc.
“Fed Chairman Ben Bernanke has three choices. On Wednesday, he will have to pick one.”
“(1) Stand his ground. He could hunker down in the corner. He could repeat, as he did in his May 22 congressional testimony, that in his personal opinion it would be a big mistake to tighten monetary policy prematurely. However, he would have to concede that other members of the FOMC threatened to join Esther George (FRB-KC) as dissenters. So he was forced to compromise and agree to reducing QE later this year if the labor market continues to improve.”
“(2) Punt. A 5/20 article posted on Bloomberg was titled, “Ebbing Deficit Likely to Keep Rates Low When Fed Tapers.” The main point: “Federal Reserve policy makers say they want to avoid a sudden increase in interest rates when the time comes to start unwinding record monetary easing. A shrinking federal budget deficit is likely to help them meet that goal.” This is a great opportunity for the Fed chairman to spin a reduction in bond purchases by the Fed as a response to the reduction in the supply of US Treasuries! I’m not sure why he hasn’t done so already.”
“(3) Throw a Hail Mary pass. On May 28, I wrote: “However, other than printing money, there is still one tool mentioned by Bernanke that has not been used, i.e., pegging bond yields. Here is what he had to say on the subject [in a November 21, 2002 speech]: ‘A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt….’” So why not announce that the Fed will phase out QE but peg the 10-year Treasury at say 2 percent?”
“In the first and second scenarios, the S&P 500 is likely to move sideways for the rest of the summer with lots of volatility, as it has since the index peaked at a record closing high of 1669 on May 21….In the third scenario, stocks would probably melt up.”
”Again, the Fed’s self-inflicted conundrum is that repressed mortgage rates have revived housing activity and lifted depressed home prices. Construction payrolls bottomed during January 2011 and are up 369,000 since then. If they continue to rise, that would help to lower the unemployment rate. But that would increase the likelihood that the Fed will have to phase out QE sooner rather than later. The resulting backup in mortgage rates could slam the brakes on the housing recovery and depress the overall economy. In this scenario, the Fed might resort to pegging the bond yield.”
Michael Feroli, Chief U.S. Economist at J.P. Morgan
“We believe Bernanke will seek to avoid speculating on when the first tapering will come, but rather emphasize what tapering means when it eventually does come. In particular, that tapering is not tightening, and that decisions regarding asset purchases are subject to different conditions than those regarding forward rate guidance.… Regarding the timing of tapering, we believe the Chairman will stress that the decision is data dependent and will be made by the Committee in the future. In sum, the events may come across as dovish with respect to forward rate expectations, but not necessarily with respect to asset purchases and their potential tapering….
“One issue that could come up in the prepared remarks is any developments regarding the exit sequencing, in particular the prospect for asset sales. Recent Fed communications have made clear that they believe there is a strong case for doing away with this last step in the exit strategy, and it would seem the main question is when this is announced.”
Ian Shepherdson, Chief Economist at Pantheon Macroeconomics
“Our view is that Mr. Bernanke is not ready to slow the pace of QE. The surge in yields over the past few weeks has performed a useful function in that it has shown the Chairman a glimpse of the future, a future in which the Fed loses control of long-term rates and the cherished recovery in the housing market is in immediate jeopardy. We expect, therefore, that the Chairman will reveal more of his personal hand than usual in the press conference on Wednesday, in an attempt to wrest control of the narrative back from the Treasury bears.”
“In short, we think the Chairman and his fellow doves have all the ammunition they need to fend off the hawks and reassure the markets that QE is set to continue at full speed for some time yet. We think the combination of soft data and a likely repeat of the 2011 debt ceiling crisis in the fall will make tapering a story for 2014 rather than this year. We have no dispute with the idea that a strategic selloff in Treasuries is coming sooner or later, but it has not started yet, despite recent appearances to the contrary.”
Jan Hatzius, Chief Economist & Sven Jari Stehn, Economist at Goldman Sachs
“We expect Chairman Bernanke to strike a generally dovish tone at the post-statement press conference. First, we would expect him to reiterate that the QE tapering decision is data dependent and would expect him to stick to his statement that tapering ‘in the next few’ meetings is possible if ‘we see continued improvement.’ Second, we would expect him to voice concern about low inflation and the drop in breakevens in response to questions about inflation. Third, we believe he might attempt to dissuade markets from frontloading too much of the entire monetary tightening process—not just the end of QE but also the normalization of the funds rate—as soon as the committee considers the first step into that direction. He could do so by stressing—as he has done in the past—that the tapering and funds rate decisions are separate in nature. One possibility of delivering this message—which might come up in the Q&A—would be to raise the possibility of lowering the unemployment threshold from its current level of 6.5 percent. We do not expect this change to occur at next week’s FOMC meeting, but believe it is a possibility going forward.
“Our baseline remains that the committee will first reduce the QE pace at the December FOMC meeting. An earlier move in September is possible if employment surprises on the upside and inflation moves back toward the target, but so is a later one. Moreover, we continue to see the first rate hike in early 2016 based on our forecast that the decline in the unemployment rate will slow.”
Michael Hanson, Senior U.S. Economist at Bank of America Merrill Lynch
“Markets will be on high alert for the FOMC meeting this Wednesday, June 19, but there are risks that what the market hears isn’t what the Fed means to say. We expect the FOMC statement and revised forecasts to at least partially acknowledge the recent slowing in the data, and for Bernanke’s press conference remarks to be on net dovish. Still, we expect the Fed to leave the door open to tapering before year end. And the markets could interpret a neutral-sounding directive as a tacit endorsement of the repricing of Fed policy. Our base case remains that persistently low inflation and slower growth in Q2 and Q3 will delay any cut in the Fed’s monthly QE3 purchase pace until 2014….
“We look for Bernanke to emphasize the conditional and flexible nature of the asset purchase program and the need for continued easing. We also expect him to reiterate the Fed’s intent to keep rates low for an extended period, even after the recovery is underway — countering the recent jump forward in market expectations for the first rate hike to late 2014. We also expect him to advocate a stock view of QE3 in which a small, technical adjustment to the purchase pace does not constitute a tightening. Here he may have trouble convincing the markets. Moreover, we expect he will leave open the possibility of tapering this year. Like his May 22 Congressional testimony, there is a risk that the markets pick up on just this remark despite the rest of his comments being dovish.”
Scott Minerd, Global CIO of Guggenheim Partners
“There is a greater-than-50 percent chance that the Federal Reserve will maintain the size and projected tenor of quantitative easing (QE) through the remainder of 2013…. The Federal Reserve will do what is necessary to protect the contribution to GDP that is coming from new construction and the wealth effect from home price appreciation. A reduction in economic output due to a flattening in the vitally important housing sector will likely lead to lower interest rates. That could cause the signals coming out of the Fed to shift away from tapering, and possibly back toward increasing or extending QE.”
John Higgins, Chief Markets Economist at Capital Economics
“We don’t expect the Fed to begin curbing its purchases this week. The economic data simply haven’t been strong enough. Moreover, it makes sense to delay any reduction in monetary stimulus for a few months while the fiscal drag linked to the sequestration cuts to Federal spending is at its peak. Our best guess is that the Fed will wait until the September meeting and that even then the tapering will begin with a very modest reduction in the monthly purchases, to perhaps $65bn per month.
“Otherwise, we still expect the asset purchases to be ended completely at some point in the first half of 2014, with short-term interest rates not rising from near-zero until 2015. Sales of the Fed’s holdings of long-term Treasury bonds shouldn’t begin until well after that and the Fed may hold on to its holdings of agency MBS until they mature.”
Maury Harris, Drew Matus, Samuel Coffin, & Kevin Cummins, Economists at UBS
“Uncertainty – about the path of growth, inflation and the impact rising interest rates will have on the economy – is likely to prompt the Fed to dampen market expectations of an early taper. However, we do not expect them to be explicit. Instead, we look for the FOMC to acknowledge the recent positive data on jobs and consumption but then to express additional concern about the low and falling rate of inflation. In our opinion the deciding factor for the timing of the initial taper will likely be the path of inflation. All else equal, continued disinflation would delay Fed actions to normalize policy.”
Brian Gardner, Senior Vice President at Keefe, Bruyette, & Woods
“We expect few changes from the FOMC. As we have previously opined, we do not expect the Fed will taper its asset purchases next week. In fact, if Dr. Bernanke is leaving the Fed in January, then we expect current policy will probably hold until his successor takes over in January 2014. As for short-term rates, as the FOMC statement has said for months, no change in short-term rates is likely for some time. We think 2015 is the earliest Fed fund rates will be raised absent some unforeseen spike in economic growth or inflation expectations.”
Neal Soss, Chief Economist at Credit Suisse
“While there is bound to be a great deal of discussion regarding the desired pace of the Fed’s asset purchases, we do not look for any significant changes to the so-called “QE3” program next week. Both hawks and doves on the committee have incentives to assert that the Fed’s ‘unconventional’ policies are working to boost jobs and secure a lasting economic recovery. And most policymakers seem anxious to scale back the pace of balance sheet expansion as soon as the data allow.
“But even if the FOMC had been considering reducing the size of its purchases as soon as the June meeting, the mixed data and market jitters seen since Chairman Bernanke’s May 22 JEC testimony argue for a delay in tapering. We maintain our longstanding view that the best opportunity to scale back the pace of asset buying may not come until later this year –perhaps in September. For now, we expect the size of the Fed’s monthly purchases to remain at $85bn ($40bn in MBS and $45bn in Treasuries).”