Fed’s Monetary Stimulus Program To Face Senate Questioning

End-of-QEOn Thursday Federal Reserve Chairman Ben Bernanke will return to Capitol Hill to read a prepared speech and respond to questions during a question and answer session with the Senate Banking Committee.

Yesterday Chairman Bernanke met before the House Financial Services Committee and spoke about the Fed’s monetary stimulus program which is drawing worldwide attention from investors who are listening closely to Bernanke’s words for signals the Federal Reserve may be close to tapering their monthly $ 85 billion bond buying program through its unprecedented third round of quantitative easing (QE III) which first began in September 2012 and still carries a nebulous end date.

Mohammad El-Erian, CEO and co-CIO of PIMCO, a global investment and management firm, admitted on Bloomberg’s In the Loop with Betty Liu on Wednesday that Bernanke has a delicate balancing act to follow when attempting to outline the Fed’s monetary policy.

“What it tells me is that Bernanke is trying a very delicate high wire act. On the one hand, he doesn’t want to scare the markets and disrupt the economic recovery as fragile as it is” El-Erian said.

“On the other hand, he doesn’t want the market to get carried away with risk taking…. so he is giving these different signals, trying to strike this delicate balance but it’s really tough” El-Erian added.

The yield on the 10 year Treasury surged in early July to over 2.70 percent from 1.66 percent in early May mostly due to comments from Bernanke in May and June about the Fed possibly slowing down their bond buying program sometime in 2013 accompanied with improving economic data.

The jump with the yield on the 10 year Treasury from May-July also caused mortgage interest rates to skyrocket.

The benchmark rate on the 30-year fixed has risen more than a full percentage point since May 1st when the rate held at 3.52 percent.

Higher interest rates for home mortgages has the potential to create a drag on the housing recovery, making it less affordable to own a home for many Americans.  Mortgage refinancing has also slowed considerably since May.

Investors and potential homeowners have attempted to map out what Bernanke’s course will be with the Fed’s $85 billion monthly quantitative easing bond buying program which has not only helped to drive interest rates lower and given relief to the housing market but also moved U.S. equities to record highs.

Yesterday Bernanke said that risks to the economy have diminished since last fall.

He cited the easing of financial stresses in Europe, gains in housing and labor markets, better budgetary positions of state and local governments, and stronger household and business balance sheets.

Bernanke admitted that the Fed’s $85 billion asset purchases depend on economic and financial developments and are by no means on a preset course.

“With unemployment still high and declining only gradually, and with inflation running below the Committee’s longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future” Bernanke said.

Bernanke spoke about “moderating” the pace of monthly asset purchases if there are gains in the labor market supported by moderate growth that picks up over the next several quarters as the restraint from fiscal policy diminishes and inflation moves back to the Fed’s 2 percent target objective.

“If the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace of purchases later this year” Bernanke said.

“And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear” Bernanke continued.

With much of the economic data still lurking out in the horizons, creating more uncertainty out in the market for investors holding their money bags, it is unsurprising that the Federal Reserve is under pressure to articulate when they will begin to moderate their asset purchases and fully exit their quantitative easing program.

During Bernanke’s address yesterday on Capitol Hill there was no specific mention about a “September” or “December” moderation date with the Fed’s asset quantitative easing asset purchases since the Federal Reserve is still awaiting more economic data before spelling out a specific timeline.

“He wants to be very clear about the journey and the journey is full of ifs. The market is interested in the destination, so the market extrapolates whatever he says about the journey to the destination” Mohammad El-Erian explained yesterday on Bloomberg T.V.

“And its this fundamental difference in perception that causes this volatility” El-Erian added.

“The Fed and Bernanke would love us to focus on every step of the journey which is very conditional but markets are different.  Markets want to know where we are going and when are we going to get there. And this tension will continue” El-Erian said.

Esther George, the president of Kansas City Federal Reserve, and a voting Fed Committee member said on Tuesday during an interview on Fox Business, “It is time to adjust those purchases.”

“Sooner is appropriate…..because we have a long way to go if we are going to do this in a gradual and systemic way” George admitted.

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