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Weekly Economic Watch - July 15, 2013‏

ByThe National Bank of Canada
Published 07/15/2013, 08:12 AM
Updated 05/14/2017, 06:45 AM
U.S. monetary policy

– Ben Bernanke went on the offensive on July 10th after markets closed to offset the turbulence caused by the release of Fed minutes. The minutes revealed that about half of FOMC members felt that QE should be stopped completely as early as this year. The information surprised market participants as Bernanke had indicated in a June 19th press conference that such an outcome was unlikely before mid-2014.

The Fed chairman went out of his way to reiterate his view that the U.S. economy needed highly accommodative monetary policy for the foreseeable future. Bernanke also suggested that if financial conditions tightened excessively, the Fed would push back and reminded investors that although there is some prospective, gradual and possible change in the mix of instruments used, this shouldn’t be confused with the overall policy thrust, which remains highly accommodative.

In our opinion, Bernanke’s main challenge was to guide the markets to shift focus from QE to the timing and potential magnitude of an eventual rate hike tightening campaign. On that front his message was that “it may well be some time after the unemployment rate hits 6.5% before interest rates reach a significant level.” This is a key message because markets had begun associating a 6.5% jobless rate with an automatic trigger for a rate hike campaign (recall that the UR currently stands at 7.6%).

As we believe that purchases of ever larger quantities of Treasuries and asset-back securities can only compound the risks associated with the exit strategy, the FOMC is well advised to focus on forward guidance to steer the markets as opposed to anchoring its credibility around QE.

To Read the Entire Report Please Click on the pdf File Below.

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