Dissecting Bernanke's Speech

On the second day of the Fed's meeting Bernanke revealed his hand regarding the end of QE: it's not over yet. However, the markets and treasuries took this to mean as they should enter sell-off mode, as the Dow Jones Industrial Average sank triple digits. The 5-year Treasury note yield spiked 18 basis points to 1.24%. The 10-year Treasury note yield jumped 12 basis points to 2.31%.

Bernanke reiterated that the 6.5% level of unemployment would be a signal for the first rate increase, not a solid trigger: "For example, assuming that inflation is near our objective at that time, as expected, a decline in the unemployment rate to 6.5% would not lead automatically to an increase in the federal funds rate target but, rather, would indicate only that it was appropriate for the Committee to consider whether the broader economic outlook justified such an increase". Bernanke goes on to say that the Fed could start to taper the bond purchasing program later in the year, if data supports the movement. However, he also said that just because one month's tapering occurred didn't necessarily mean that the next month would remain in the same trend of tapering, and could even have increased purchasing by the Fed due to weaker data the next month. Bernanke alluded to the fact that once unemployment hit 7% the Fed would halt its bond purchasing.

Bernanke stated that in his view the economy is doing better, when asked what he meant specifically, he cited the housing market, something that was dissected in the previous blog post as being superficially inflated by institutional buyers, not normal Americans. This artificial inflation could come back to bite the housing market as soon as a rate increase happens, making it even more difficult for average Americans to purchase a home.

All in all, the main point to take away from this conference was that the taper will likely begin before the end of the year and QE will end sometime mid-2014. The markets are potentially overreacting to the news that was released today, as it is not the fundamental shift that usually drives these moves.