Tuesday, May 28, 2013

The "Taper Talk" in the Fed's Minutes and Bernanke's Q&A, 10-Year Yield Reaction

For reference, here is the official "taper talk" that roiled the markets last week. The 10-Year Treasury yield broke above its March high on the news. The next resistance level to break looks like 2.4%. To test that level, it would first need to break out of its near-term ascending channel, or it could take a while. Finally, if the yield can successfully break above 2.4%, it would then go to war with its 2007 downtrend. Then things would start to get interesting.

Source: Stockcharts.com

1) The Minutes of the FOMC meeting on April 30/May 1, 2013 via FederalReserve.gov (released May 22, 2013).

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee's economic objectives. Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.

2) Bernanke's Q&A session with the Joint Economic Committee via Reuters.

BERNANKE ON EVENTUAL EASING FLOW OF ASSET PURCHASES:

"The program relates the flow of asset purchases to the economic outlook. As the economic outlook - and particularly the outlook for the labor market - improves in a real and sustainable way, the committee will gradually reduce the flow of purchases.

"I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving."

BERNANKE ON TIMING OF ADJUSTING PURCHASES:

"If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward."

"I don't know" was his answer when asked if purchases would be lowered before the Labor Day holiday, which is September 2.

Related: Tepper: S&P Could Enter "Hyper Mode" If Fed Doesn't "Taper Off" QE In June, $SPY Cheap Based on Equity Risk Premium (Chart)

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