The Federal Reserve's FOMC monetary policymaking body just shocked markets with the decision to refrain from reducing the amount of monthly bond purchases it makes under its quantitative easing (QE) program.
A "tapering" of QE was widely expected on Wall Street, and judging by the market reaction to the release of this FOMC statement, it's pretty clear that markets were indeed pricing in an announcement of a reduction of bond purchases by the Fed going forward (stocks, bonds, and gold are surging in the wake of the release).
Federal Reserve chairman Ben Bernanke just delivered a press conference and Q&A with reporters. Below is our live-blog.
2:30 PM: Bernanke is reading prepared remarks, which are largely recycled from the FOMC statement (click here for the full text of the statement).
2:38 PM: Bernanke says the FOMC concluded that the economic data do not provide sufficient evidence that the economy is in line with the FOMC's baseline economic outlook such that it justifies a reduction in quantitative easing at this meeting.
2:39 PM: "As today's decision underscores, asset purchases are not on a preset course."
2:41 PM: Bernanke says the FOMC may not elect to hike the federal funds rate until the unemployment rate is "considerably below" the central bank's 6.5% threshold.
2:43 PM: Q&A begins!
2:44 PM: Bernanke says most of the improvement in the unemployment rate is due to job creation, not the downward trend in the labor force participation rate. He calls the unemployment rate the single best indicator of the labor market, but admits that it's not fully representative.
2:46 PM: When asked whether the Fed's talk of tapering in recent months is responsible for the tightening in financial conditions that has partly delayed them from tapering today, Bernanke says the Fed tried to communicate as clearly as possible its outlook for monetary policy.
2:49 PM: Bernanke says tapering could still happen later this year yet, but even if they do that, continued subsequent steps to taper would be dependent on continued improvement in the economy.
2:52 PM: Bernanke ducks a question about his future plans, staying on for a third term, etc.
2:57 PM: Bernanke admits that the Fed has been overoptimistic on out-year growth, but says the Fed was too pessimistic on unemployment this year, as the headline unemployment rate has fallen faster than the FOMC had projected.
3:00 PM: Bernanke says the FOMC does not need a scheduled press conference to make a major decision like the first reduction in quantitative easing. It could hold a press conference with reporters or find some other way to get the rationale behind the decision out to the public.
3:01 PM: Bernanke says the FOMC is discussing how it could clarify its forward guidance on the federal funds rate; e.g., an inflation floor, which he says could be a sensible modification to the guidance.
3:03 PM: "I don't recall stating that we would do any particular thing at this meeting."
3:04 PM: Bernanke says a factor that concerned the FOMC was upcoming fiscal headwinds. A government shutdown, and perhaps even moreso, a failure to raise the debt limit, could have negative effects on the economy, which the Fed would have to take into account, because the central bank is charged with helping to keep the economy on course.
3:11 PM: Bernanke says monetary policies have been successful in lowering interest rates in recent years, thereby promoting economic recovery. Moreover, monetary policy provided at least a partial offset to fiscal drag.
3:16 PM: Bernanke says that to the extent that the FOMC's announcement today makes conditions a little bit easier, the central bank welcomes that.
3:19 PM: Bernanke says the Fed has strong institutional credibility. He is not particularly concerned about the political environment for the Fed, and that it will maintain its independence going forward.
3:20 PM: Bernanke says the FOMC has regularly reviewed forward guidance, and says there are a number of ways it could be strengthened. He says it's very important that the Fed not take these steps lightly, and that it makes sure that changing forward guidance would be credible.
3:21 PM: Bernanke says it's certainly the case that there are too many people in poverty. He says the economy is becoming more unequal.
3:24 PM: Bernanke says emerging markets are an important issue. The Fed has a lot of economists that spend all of their time looking at international aspects of monetary policy. Problems in emerging markets, or any country, for that matter, can affect the U.S. as well.
3:27 PM: Q&A concludes.
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