Today, most were expecting Federal Reserve Chairman Ben Bernanke to attempt to soothe markets.
After all, volatility in the Treasury market, caused by uncertainties surrounding how soon the Fed will begin to taper the pace of its bond-buying program, has had earthshaking reverberations around the world. (Volatility in the Japanese government bond market has increased dramatically, and emerging market stocks, bonds, and currencies have been getting crushed as Treasury yields have risen in the States.)
Instead, Bernanke and the Fed did just the opposite. The FOMC revised up its economic forecasts – implying a quicker economic recovery, meaning tapering is closer than previously assumed – and even laid out a roadmap for tapering, saying bond buying could be completely finished by mid-2014.
This development wasn't even borne out of the discussion in the Q&A with reporters – Bernanke had it ready to go in his prepared remarks to launch the presser. Guns blazing.
"If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year," said Bernanke, referring to the FOMC's newly-released macroeconomic projections. " And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."
Bernanke went on to say that "in this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains."
"Bottom line - no backing down, no turning back, the Fed will taper unless the data deteriorate," said Société Générale strategist Kit Juckes following the presser. " There is debate, but the fact the vol has not prompted second thoughts seems to me key."
No second thoughts.
Indeed, when pressed during the Q&A about the recent surge in Treasury yields, Bernanke said, "Yes, rates have come up some. That's in part due to more optimism – I think – about the economy. It's in part due to perceptions of the Federal Reserve. The forecasts that our participants submitted for this meeting, of course, were done in the last few days, so they were done with full knowledge of what happened to financial conditions. Rates have tightened some, but other factors have been more positive – increasing house prices, for example."
Then, Bernanke concluded, "If interest rates go up for the right reasons – that is, both optimism about the economy and an accurate assessment of monetary policy – that's a good thing. That's not a bad thing."
In other words, instead of leaning against the rise in yields that markets have seen over the past several weeks, Bernanke essentially green-lit the sell-off.
The bond market did not take the tapering road map nor Bernanke's assessment of Treasury market volatility very well. Treasuries, which were already taking a hit following the release of the 2 PM statement and forecasts, really started selling off as Bernanke spoke.
The yield on the 10-year Treasury note hit a high of 2.33% during the presser (versus levels around 2.21% before the 2 PM releases).
For now, it appears that the FOMC is undeterred by recent volatility in the Treasury market, and that's something investors should keep in mind.
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