Though it remains uncertain when the Federal Reserve will start tapering its QE3 program, the markets have jumped at the slightest news of the fate of the massive monthly asset buys, action that caused one fed governor Thursday to criticize the uncertainty.
Recent market movements "have been larger than would be justified by any reasonable reassessment of the path of policy," said Federal Reserve Governor Jerome Powell in a speech at the Bipartisan Policy Center, a Washington, D.C.-based think tank.
Those movements have been large. At the close of the Federal Open Market Committee meeting, stocks began to plummet, in part on Fed Chairman Ben Bernanke's statements at a post-meeting press conference that the Fed might yet this year start to taper its $85 billion monthly asset buys. On Thursday, the day after the meeting, the S&P 500 and Dow Jones Industrial Average alike posted their largest one-day drops since 2011. Meanwhile, yields on the 10-year treasury spiked, from around 2.2 percent at the start of last week to 2.6 percent at the start of this week.
Powell said that Bernanke in fact gave very little new information about tapering in his remarks last week: "Any signal of a change in monetary policy the chairman gave in his conference was very small."
It's not just the end of quantitative easing that markets are watching for; it's the end of near-zero interest rates. The Federal Reserve has maintained an ultra-low federal funds rate since late 2008 in an attempt to stimulate the economy. Powell, who joined the Open Market Committee in January, noted that 15 of 19 forecast participants at the most recent meeting said they don't foresee that rate increasing until 2015 or 2016.
That means markets could be mistaken if they are expecting an earlier change in interest rates, said Powell.
"To the extent the market is pricing in an increase in the federal funds rate in 2014, that implies a stronger economic performance than is forecast," he said. Currently, the FOMC says it expects to maintain low interest rates as long as unemployment is above 6.5 percent and inflation forecasts are below 2 percent, though members have stressed that those figures represent thresholds and not policy triggers.
While Powell provided his insights into market movements, he did not provide new information about the key question on investors' minds: when the Fed will start to taper QE3. Rather, Powell echoed Bernanke's repeated assertion that pulling back will be a matter more of the speed of recovery than of set timetables. If the recovery strengthens, the Fed may dial down QE3 more quickly, and if the recovery slows, the Fed may decide to continue or even increase the size of the asset purchases, said Powell.
"I want to emphasize the importance of data over date," he said. "The path of purchases is in no way predetermined; we will monitor economic data and adjust our purchases as appropriate."