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US Fed committed to easy policy for as long as needed

Nov 20 2013, 12:11 IST
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US Fed has held interest rates near zero since late 2008. US Fed has held interest rates near zero since late 2008.
SummaryUS Fed could hold interest rates near zero until US unemployment falls under 6.5 per cent.

wrote JP Morgan economist Michael Feroli in a note.

MESSAGE RECEIVED

The Fed stunned markets in September when it decided to keep buying bonds, after Bernanke said back in June it expected to start scaling the program back later this year. Those expectations were allowed to harden over the summer.

The chairman noted this decision caused market volatility -- which many economists blame on poor communication by Bernanke himself -- but he said market expectations for future rate hikes were now better aligned with the Fed's own forward guidance on future rate hikes.

Fed fund interest rate futures currently indicate a higher than 50 percent chance of a first rate hike in September 2015, and the move is not fully priced in until November, 2015.

Before September's Fed announcement, markets had pulled expectations for the first rate hike forward into 2014.

"Although the FOMC's decision came as a surprise to some market participants, it appears to have strengthened the credibility of the Committee's forward rate guidance," Bernanke said.

"Following the decision, longer-term rates fell and expectations of short-term rates derived from financial market prices showed, and continue to show, a pattern more consistent with the guidance."

SPEAKING AND WRITING

The Senate Banking Committee, which held a hearing for Yellen last week, will vote on her nomination on Thursday to pass it to the full Senate for consideration. Yellen, who is seen as a dove who is less concerned about inflation than some peers, is expected to win confirmation with relative ease.

Bernanke, in his first public comments on what life after the Fed will hold for him, suggested that he might follow in the footsteps of his predecessor, Alan Greenspan, by writing and hitting the highly lucrative speakers circuit.

"I look forward to writing and speaking and having a little more time to contemplate some interesting issues," he said.

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