Ben Bernanke has been chairman of the Federal Reserve since 2006, so he should know by now that every syllable that passes his lips is worth billions of dollars to the bond market. But Bernanke seemed to step on his own message in congressional testimony last month when he said the Fed could “take a step down in our pace of purchases” in the “next few meetings” if it sees continued and sustainable improvement in the economy. Bond prices instantly fell and 10-year Treasury yields are now around 2.2 percent, vs. 1.9 percent before he spoke. Mortgage rates rose as well, potentially chilling the housing recovery.
On Wednesday, Bernanke will have a chance to clarify his and the Fed’s intentions when he gives a press conference at the conclusion of a two-day meeting of the rate-setting Federal Open Market Committee. For the sake of consistency—not to mention minimizing cardiac arrest on trading desks—Bernanke needs to stay on message. That means sticking with the point he has been making for the last several years, which is that short and long interest rates will stay low until the economy is well on the way to full recovery. That’s what he told Congress in May when he warned against “premature tightening,” before he muddied the message by referring to the potential for tapering the pace of bond purchases.
Recent events will loom large at the press conference. President Barack Obama gave the clearest signal yet that Bernanke’s time at the Fed will end when his second four-year term expires at the end of January. In an interview with Charlie Rose that aired June 17, Obama praised Bernanke for doing “an outstanding job” but also said “he’s already stayed a lot longer than he wanted or was supposed to.” A White House official declined to comment on what the president’s remarks meant about the possibility of Bernanke’s getting—or even wanting—a third term. Vice Chair Janet Yellen, who supports keeping interest rates low, is considered his most likely successor.
Some of those who favor withdrawing monetary stimulus soon worry that low rates will crank up inflation. But inflation stayed low in May, the government said Tuesday. The consumer price index rose just 0.1 percent after falling 0.4 percent in April. The core index, which excludes volatile food and fuel costs, rose 0.2 percent in May.
On the other hand, hawks could argue that the recent jump in interest rates hasn’t hurt housing. Starts on housing construction rose 6.8 percent in May, while applications to build single-family homes rose 1.3 percent to the highest since May 2008.
