Bernanke during Wednesday's press conference - Image credit: Getty Images via @daylife
In his post-FOMC press conference, Fed Chairman Ben Bernanke made it clear that he had lost control of the market, causing a tightening of financial conditions that directly hit the highly supported housing market through higher mortgage rates. Trouble is also brewing in Washington, with possible fights over a government shutdown as Speaker Boehner puts pressure on President Obama, and the specter of another debt ceiling fight, which also spooks Bernanke and the FOMC. The Chairman appears to have boxed himself in, as the market roars higher on any indication of monetary stimulus, and could tank if the training wheels come off.
Bernanke lied. At one point, the Chairman of the Federal Reserve told reporters: “we are somewhat concerned. I don't want to overstate it. But we do want to see the effects of higher interest rates on the economy, particularly mortgage rates on housing.” Yet Bernanke, and the rest of the FOMC, are gravely concerned.
Speaking after surprised markets rallied to record highs in the aftermath of an expected decision to keep monetary stimulus at a monthly rate of $85 billion, the Chairman revealed he’s scared about the capacity of the economy to continue growing, and the jobless rate to descend further, without his help. Bernanke was clear, saying “our policy decision today makes conditions just a little bit easier, that's desirable,” adding, “we want to make sure that the economy has adequate support, and in particular, it's less surprising [to] the market [so as to avoid financial] tightening until we can be comfortable that the economy is, in fact, growing the way we want it to be growing.”
Back in June, I noted Bernanke’s first mistake was losing control of the market, as he telegraphed the FOMC’s intention to begin to taper its asset purchases later this year, expecting the unemployment rate to fall to 7% by mid-2014, when QE would be finalized. Yet those words sparked an intense sell off in risk assets and a marked jump in interest rates. As I previously reported:
In the three months since the June FOMC meeting where tapering was formally introduced, the yield on 10-year Treasuries has jumped more than 70 basis points, increasing “by a greater amount than during the entire previous interest rate tightening cycle between June 2005 and June 2006,” Tradeweb’s analysts explained.
This tightening hit homeowners where it hurt. Goldman’s data showed that as rates on 30-year fixed mortgages rose 1.2 percentage points since May, the monthly mortgage payment for a median-priced home with a 20% down payment rose by $110. “The Fed is particularly sensitive to the rise in mortgage rates given the special effort it has devoted to supporting the housing market through its credit easing policies (MBS purchases),” explained Goldman’s team, while Nomura’s researchers expect tapering to consist entirely of Treasuries.
Beyond tightening financial conditions, Bernanke is scared the economy won’t have the strength to live through another intense political battle between Obama and the Republican caucus. He remembers that nefarious effects of the 2011 debt ceiling debate, which led to the first downgrade of the US’ triple-A credit rating and a prolonged market rout that hampered growth.
The Chairman, therefore, has pushed himself into a corner. While the market had assimilated a “soft taper,” he doesn’t believe the economy is in condition to do so. He acknowledges that he made a mistake last time, making it clear they were ready to taper, as that led to higher rates and tighter monetary conditions. It comes as no surprise that homebuilder stocks including
While Bernanke admitted the Fed has been optimistic about its growth projections, he did note the taper could come later this year. “If data confirms our basic outlook,” which consists of an improving labor market supported by economic growth and inflation moving toward the Fed’s 2% goal, “we are going to take a first step [to wind down QE], maybe this year,” Bernanke told reporters. Yet, given the impact on interest rates, with the 10-year currently trading at 2.71% and 30-year mortgage rates now near 4.5%, it is looking increasingly difficult for the FOMC to cut down on the stimulus.
Ultimately, though, it won’t be Bernanke’s problem: his term expires in January.
