Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed was in no rush to end its easy-money quantitative easing program because the U.S. jobs picture remained weak overall while inflation was low. The Treasury bond market responded with a drop in prices and a rise above 2% in the 10-year note yield.
But even as low interest rates have helped create jobs and support home prices, savers who rely on interest income from savings accounts or government bonds are receiving very low returns, Bernanke acknowledged in prepared remarks before testifying before Congress’ Joint Economic Committee.
“Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability,” Bernanke said in his remarks. “For example, investors or portfolio managers dissatisfied with low returns may ‘reach for yield’ by taking on more credit risk, duration risk or leverage.”
The Federal Open Market Committee does recognize the drawbacks of persistently low rates, Bernanke said, adding that the FOMC “actively seeks economic conditions consistent with sustainably higher interest rates.”
But ending QE can’t guarantee that outcome, he said: “Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”
In early afternoon trading, the 10-year Treasury note was trading up 4.78%, 0.09 points higher, to yield 2.04% versus the day’s open of 1.93%.
Anthony Valeri, fixed-income market strategist for LPL Financial, said the bond market’s response reflected uncertainty about where the Fed is ultimately headed.
“Unfortunately, I don’t think Bernanke clarified anything today,” Valeri said in a phone interview about an hour into Bernanke’s congressional testimony. “The market knew that tapering QE was going to happen sometime this year. But as for Bernanke’s comments about doing it over the next few meetings depending on the economic data—we already knew that. That creates nervousness in the bond market because we don’t have clarity.”
The 10-year rallied right after the release of Bernanke’s prepared comments, “which were quite dovish,” Valeri said. A strong equity market reaction then led to the Treasury selloff, he said, noting that the Japanese yen also weakened substantially as money left that safe-haven currency.