The Fed’s Mixed Messages

Last Wednesday, markets reacted strongly to a mixed message coming out of Federal Reserve (Fed) Chairman Ben Bernanke’s congressional testimony and to the Federal Open Market Committee (FOMC) minutes. The different messages came be summed up from the following quotes.
The fi rst quote, from Bernanke’s prepared remarks, is similar to the FOMC Policy Statement from May 1:
“A premature tightening of monetary policy…would carry a substantial risk of slowing or ending the economic recovery and causing infl ation to fall further.”
The second quote, from the Q&A portion of Bernanke’s testimony, was the real driver of the fall in equity markets that day.
“We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook… If we see continued improvement and we have confi dence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases.”
The FOMC minutes from the May 1 meeting also had a hawkish tilt.“A number of participants expressed willingness to adjust the fl ow of purchases downward as early as the June meeting…”