Ben Bernanke says Fed likely to reduce bond buying this year

Ben Bernanke8217;s call

Moderate growth should lead to a further healing in the job market as headwinds facing the economy ease,Bernanke said. He also said policymakers expect inflation to move back up toward their long-term 2 percent goal.

The Fed8217;s willingness to dial back on the amount of stimulus it is pumping into the economy reflects growing confidence in the sustainability and strength of the recovery. Since cutting interest rates to near zero in late 2008,the central bank has more than tripled its balance sheet to about 3.3 trillion to drive borrowing costs down and spur hiring.

8220;The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year,and if the subsequent data remain broadly aligned with our current expectations for the economy,we will continue to reduce the pace of purchases in measured steps through the first half of next year,ending purchases around mid-year,8221; Bernanke said.

He added that the jobless rate should have declined to near 7 percent from its current rate of 7.6 percent by the time bond purchases are halted. If its forecasts proved too optimistic,the Fed could stop reducing its bond purchases or even raise them again,Bernanke said.

The Standard amp; Poor8217;s 500 stock index .SPX closed down nearly 1.4 percent,while yields on the 10-year U.S. Treasury note hit 2.36 percent,the highest level since March 2012,as traders recalibrated bets to account for a more hawkish Fed. The dollar also strengthened.

In a change of policy,Bernanke also said a majority of Fed policymakers believe the central bank should hang onto the mortgage assets it acquired through its unconventional monetary stimulus when it decides to tighten monetary policy.

He made the statements at a news conference on the Fed8217;s decision to continue buying 40 billion in mortgage-backed securities and 45 billion in longer-term U.S. government securities each month.

After a two-day meeting,the Fed8217;s policy-setting panel offered a more upbeat assessment of the risks facing the economy than it have given after the last meeting in May. 8220;The committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall,8221; it said.

A Reuters poll of 17 top Wall Street bond dealers found that 16 expect a reduction in the Fed8217;s asset purchases by year-end,with a plurality pegging the central bank8217;s September meeting as the starting point. These dealers saw the Fed slowing its bond purchases by 10 billion to 28 billion on that first pass,with a median response of 20 billion.

RATE RISE NOT SEEN UNTIL 2015

Bernanke stressed that a slower pace of bond buying would still be adding support to the economy,and that any decision to begin removing stimulus remained a long ways off. Any eventual increases in interest rates would also be gradual,he added.

8220;They do indeed plan to taper purchases later this year and hope to be done by next summer. Bernanke wants to communicate that this is not necessarily tightening,but the market may not see it that way,8221; said Axel Merk,president and chief investment officer of Merk Investments in Palo Alto,California.

Esther George,the president of the Kansas City Fed,again dissented against the Fed8217;s expansion of its support for the economy,expressing concern it could fuel financial imbalances and hurt the central bank8217;s goal of keeping inflation contained. She has dissented at every policy meeting since January.

But in a surprise,the St. Louis Fed chief,James Bullard,also dissented,though in the opposite direction,arguing the Fed should have signaled more strongly its willingness to keep its stimulus in place to defend its 2 percent goal for inflation.

In its statement,the Fed repeated that it would not raise rates until unemployment hits 6.5 percent or lower,provided that the outlook for inflation stays under 2.5 percent.

Bernanke made clear that threshold was merely for considering a rate hike,not a trigger for necessarily making one. In fresh quarterly projections,14 of the 19 members of the Fed8217;s policy panel said they did not think it would be appropriate to raise rates until some time in 2015.

In a sharp downgrade,the Fed forecast the PCE price index,its preferred gauge of the price pressures facing consumers,would rise just 0.8 to 1.2 percent this year. However,it saw inflation heading back to 1.4 to 2.0 percent in 2014 and 1.6 to 2.0 percent in 2015.

A low inflation rate could allow the Fed to keep interest rates lower for longer and could even force additional monetary easing if low inflation persists or inflation falls further.

In a slight upgrade to their economic projections,officials forecast unemployment to average 6.5 to 6.8 percent in the fourth quarter of next year,and 5.8 to 6.2 percent in the final three months of 2015.

They forecast U.S. economic growth of between 3.0 and 3.5 percent next year and 2.9 to 3.6 percent in 2015.

Analysts think U.S growth slowed a bit in the second quarter of this year in the face of fiscal drag from government spending cuts and higher taxes; recent readings from the economy have been mixed.

The labor market,a central focus of Fed efforts to boost growth,has notched steady improvement with 175,000 new jobs added in May. But U.S. manufacturers have been hurt by softer overseas demand,and inflation has fallen even further beneath the Fed8217;s goal.

The consumer price index was up 1.4 percent in May from a year ago. But the PCE price index rose just 0.7 percent in the 12 months through April,the most recent reading.

INSTANT VIEW 8211; Fed to keep buying bonds,boosts 2014 forecasts

The U.S. Federal Reserve on Wednesday said it would keep buying 85 billion in bonds per month and gave no explicit indication that it was close to scaling back the program,despite intense market speculation it could soon start drawing it to a close.

KEY POINTS: Describing the economy as expanding moderately,Fed officials cited further improvement in labor market conditions,and noted inflation had been running below the Fed8217;s 2 percent long term goal. They also reiterated that unemployment is still too high for their comfort,reinforcing their desire to keep buying assets until the outlook for jobs improves substantially,but offered a slightly more upbeat assessment of the balance of risks to the nation8217;s growth. In fresh quarterly projections,14 of the 19 members of the Fed8217;s policy-setting committee said they did not think it would be appropriate to raise rates until some time in 2015. Three officials saw 2014 as the year that rates would lift off from near zero,versus four policymakers back in March. One official continued to anticipate the first rate hike in 2016 and one in 2013.

COMMENTS: AXEL MERK,PRESIDENT AND CHIEF INVESTMENT OFFICER,MERK INVESTMENTS,PALO ALTO,CALIFORNIA:

8220;The main news is that they do indeed plan to taper purchases later this year and hope to be done by next summer. Bernanke wants to communicate that this is not necessarily tightening,but the market may not see it that way. But remember,their forecasts are rarely accurate. So this may be them engaging in the same wishful thinking as everybody else. We8217;ll have to see whether the numbers cooperate. What we do know is that inflation expectations are coming down with a vengeance and the employment is not improving at a very strong pace.8221;

FRED DICKSON,CHIEF MARKET STRATEGIST,D.A. DAVIDSON amp; CO.,LAKE OSWEGO:

8220;He took off the table the possibility of tapering in September,but his comments about the possibility of slowing down rate of asset purchases toward the end of the year and eliminating them by mid-year provided some clarity8230; but may have caused a little bit of surprise.

8220;He gave the first clue as to when possibly the asset purchase program might stop,and that was the catalyst that caused the market reaction.8221;

JOSEPH GRECO,MANAGING DIRECTOR AT MERIDIAN EQUITY PARTNERS IN NEW YORK:

The selloff is 8220;clearly a reaction to Fed8217;s affirmation that with improvements in employment and the economy it would appear possible that they would mostly likely pursue a varied pace of asset purchasing by the end of this year.8221;

FRANK MCGHEE,HEAD PRECIOUS METALS TRADER,INTEGRATED BROKERAGE SERVICES LLC,CHICAGO:

8220;The statement indicates that the economy is on the mend,and the Fed is expecting lower than previously projected levels of inflation. You are looking at continued slow growth but no inflation and no panic on the horizon,that makes gold less attractive and ultimately makes stocks more attractive.8221;

ROB LUTTS,PRESIDENT AND CIO,CABOT MONEY MANAGEMENT,SALEM,MASSACHUSETTS:

8220;The most surprising thing was the raising of the growth rate for 2014. They took it up a healthy notch. That8217;s telling you they see a pattern of continued strength that will continue to move forward into next year.

8220;Widely expected they were to going to talk about tapering and a September/October time frame for easing off bond purchases. That maybe is helpful to the market that it is not immediately around the corner. Maybe people are thinking it is 2014 rather than 2013 but clearly it is coming.

8220;The growth figure is what the bond market is going to focus on most and bond participants are saying if the Fed is correct we have to start thinking higher rates in the near term.

8220;They punted on tapering. They know the market expects it and if the market needed to hear more they would have said something. I believe they feel the market has tapering fully in it. By raising the growth number they have effectively done a similar thing. That is a stronger communication. Many economists have a slower recovery in place and it means maybe a more normal economic environment next year.8221;

GREG MCBRIDE,SENIOR FINANCIAL ANALYST,BANKRATE.COM,NEW YORK:

8220;Interestingly there is greater dissent being voiced within the voting members of the committee,the new vote against actually indicating potentially a desire for even more stimulus to defend the inflation goal. It clearly balances out that hawkish dissent,particularly at a time when the economy is still not where the Fed wants it to be,and gives them a case to maintain the pace of stimulus throughout the summer months.

8220;The statement contained a notable pat on the back,saying the downside risks to the outlook for the economy and the labor market have diminished since the fall,which is a necessary precursor if they are going to get to the point where they do start to taper.8221;

GEORGE RUSNAK,NATIONAL DIRECTOR OF FIXED INCOME FOR WELLS FARGO PRIVATE BANK IN PHILADELPHIA:

8220;Clearly it seems like the Fed is signaling they will begin tapering. They are either going to start in either the fourth quarter or the first quarter of next year,but that is going to happen. The idea of when that happens is going to be the first sign of trying to ease into that process.

8220;The fact they brought in the conversation around unemployment potentially hitting their target towards the year-end of 2014. That maybe not necessarily spooked the bond market but may have given an idea to the bond market that not only are they talking about removing themselves from QE but potentially removing themselves from a zero interest rate policy at the end of next year.8221;

CAMILLA SUTTON,CHIEF CURRENCY STRATEGIST,SCOTIABANK,TORONTO:

8220;I think the FX reaction was due to the upgrade in employment forecasts. The forecasts suggested that the unemployment rate will fall to 6.5 percent in 2014,which means that the Fed could hike rates sooner than expected,possibly as early as the first quarter of 2015. And that8217;s positive for the U.S. dollar.8221;

IAN LYNGEN,SENIOR GOVERNMENT BOND STRATEGIST,CRT CAPITAL GROUP,STAMFORD,CONNECTICUT:

8220;The net takeaway was the fact that they didn8217;t offer anything specific on the timing for tapering QE. We had a new dissenter,being Bullard,who8217;s now dissenting from the dovish side. He8217;s more worried about inflation. However,in the statement the Fed characterized the benign inflation as partially reflecting transitory influences but reiterated inflation expectations remain stable.

8220;They also upgraded the economic outlooks and said that the committee views the downside risks for the economy and the labor market as having diminished since the fall- That simply means lower than they were in the fall. I think that is what people are looking at as a bit more hawkish in there and within the projections,I would say that the surprise for us at least was the fact that they lowered the unemployment rate forecast pretty significantly,suggesting that they believe that the improvements are going to be sustainable and implicitly that as the labor market accelerates,the labor participation rate will not increase at a pace to put upward pressure on the unemployment rate.8221;

FRANK LESH,FUTURES ANALYST AND BROKER,FUTUREPATH TRADING LLC,CHICAGO:

8220;The thing that I noticed really so far was the fact that downside risks to the economy are diminishing. That to me would imply that we8217;re closer to the Fed reducing its support for the economy,and that8217;s all we know so far.8221;

DAN DORROW,HEAD OF RESEARCH,FAROS TRADING,STAMFORD,CONNECTICUT:

8220;What was surprising was the change in 2014 forecasts for unemployment. They8217;ve also said the downside risks to the outlook have reversed. So they are slightly more constructive on the economy,and the unemployment call would move forward the first fed funds rate hike,which is still way out there but has been moved forward slightly. This is going to push yields up. We8217;re seeing them rise at the shorter end of the curve,too,so you8217;d expect the dollar to go higher,especially against the euro and sterling.8221;

BUCKY HELLWIG,SENIOR VICE PRESIDENT AT BBamp;T WEALTH MANAGEMENT IN BIRMINGHAM,ALABAMA:

8220;I think still today the driving event will be what Ben Bernanke says,but with regard to the statement,it was a positive from the standpoint that they8217;re going to continue to buy at the 85 billion level,but some of the statements in there suggest that things are setting up for a taper at some point,and that8217;s kind of when the stock market went the other way.

8220;The suggestion that economic activity has been expanding at a moderate pace and that labor markets show further improvements,I think market participants are reading that the economy is improving perhaps enough to put in some curtailment of the purchases later on8230;The more optimistic outlook on the economy,it looks like traders view that as tapering being closer rather than farther in terms of the calendar.8221;

ENRIQUE ALVAREZ,LATIN AMERICA STRATEGIST,IDEAGLOBAL,NEW YORK:

8220;The U.S. is seeing stronger growth and somewhat lower unemployment projections. This means that this view that THEY are going to move up the curtailment of asset purchases is still on the table,it is not completely removed.

8220;As long as that is on the table it guarantees that Latin America is going to continue to see volatility in the markets,and the defensive stance of carry trades in the currency market is going to remain intact.8221;

MIKE KASTNER,HEAD OF FIXED INCOME AT HALYARD ASSET MANAGEMENT IN WHITE PLAINS,NEW YORK:

8220;The statement was a little more dovish in the comments than I thought it would be. Long-dated Treasuries sold off. That was the story of the old bond vigilantes saying if the statement is more dovish,then inflation is more likely to be a problem down the road so get in front of that now by selling the bond and increasing the inflation premium.

8220;We will get a better sense of the timing of the tapering during the press conference as to whether it might occur in the next couple of FOMC meetings or whether it8217;s pushed out to later this year or next year.

8220;The Bullard vote was a little bit of a surprise. That8217;s why I consider it to be a net dovish statement.8221;

VASSILI SEREBRIAKOV,CURRENCY STRATEGIST,BNP PARIBAS,NEW YORK:

8220;The markets are reacting to the more positive economic assessment in the statement,notably the comment that economic risks have diminished. I think it8217;s being seen as a signal that the Fed is close to tapering. U.S. yields are higher and they8217;re pushing the dollar higher as well against the other funding currencies such as the Japanese yen. Obviously we8217;ll have to wait til the press conference to get any additional details on the tapering.8221;

PARESH UPADHYAYA,HEAD OF CURRENCY STRATEGY,PIONEER INVESTMENTS,BOSTON:

8220;It8217;s hawkish. They talked about the labor market showing improvement and that the downside risks have diminished since autumn. That reflects the fact that the fiscal tightening has not hurt as much as they had feared. The forecasts are significant,too. Not only is their outlook for 2014 better but their unemployment call has the jobless rate possibly hitting 6.5 percent in 2014. Depending on what Bernanke adds later,I think we8217;ll be off to the races when it comes to higher Treasury yields and a higher dollar,especially against the yen. And we should see a sell-off in risky assets.8221;

RICK MECKLER,LIBERTYVIEW CAPITAL MANAGEMENT LLC,JERSEY CITY,NEW JERSEY:

On the fall in stocks: 8220;There8217;s no change in the program. I would not be surprised to see a round-trip here where the first reaction is down because there8217;s almost nothing that8217;s going to change the ultimate move,which will eventually be to taper. What investors will need on the other side is just some evidence that8217;s offset by economic growth. That8217;s been missing lately.8221;

TOM PORCELLI,CHIEF U.S. ECONOMIST,RBC CAPITAL MARKETS,NEW YORK:

8220;There were really no significant changes to the Fed statement,although they modestly improved their assessment of the labor market. Overall this was a net neutral statement and the meat of the market8217;s reaction should come from the press conference.8221;

IRA JERSEY,INTEREST RATE STRATEGIST,CREDIT SUISSE,NEW YORK:

8220;The statement disappointed a little,in that it made it sound like they are going to taper. They are not worried about the market8217;s outlook for lower inflation,so they kind of ignored the TIPS market. Simultaneously they lowered their forecast for the unemployment rate a little bit,so in effect they may have pulled forward some people8217;s expectations of a hike just a little bit. That8217;s one of the reasons you are seeing the selloff in Treasuries that we are seeing,particularly in the belly of the curve.8221;

RANDY FREDERICK,MANAGING DIRECTOR OF ACTIVE TRADING AND DERIVATIVES,CHARLES SCHWAB,AUSTIN,TEXAS:

8220;The interesting thing is that the VIX is lower when the market is lower. I don8217;t think we saw anything that was surprising so far from the Fed and I don8217;t really think that market was expecting anything new because you would really see institutions buying VIX puts and calls if they thought things would be uncertain. That wasn8217;t the case. For now,it8217;s nothing too surprising,but we would have to wait until Bernanke press conference.8221;

TANWEER AKRAM,SENIOR ECONOMIST,ING,ATLANTA,GEORGIA:

8220;The statement is as expected in the sense that the FOMC acknowledged improvement in labor markets but acknowledged that the unemployment rate is still elevated and that fiscal policy is likely to restrain growth. It maintained its commitment to asset purchases conditional on the data. A bit different was there was a dovish vote by James Bullard stating the FOMC should be more accommodative in light of inflation undershooting the Fed8217;s long-term target.8221;

MARK LUSCHINI,CHIEF INVESTMENT STRATEGIST AT JANNEY MONTGOMERY SCOTT IN PHILADELPHIA:

8220;There8217;s no great surprise,and this is something of a non-event statement. It didn8217;t spook markets in terms of advancing notions of tapering,but it largely leans towards deferring that tapering until later this year. The fact that this is status quo is enough to put a little pressure on the market,largely because of the run-up we8217;ve seen over the past few days.

8220;It is interesting that Bullard voted to dissent against any altering of the policy,that bodes towards the idea that there will be tapering later this year.8221;

MARKET REACTION:

STOCKS: U.S. stock indexes were modestly lower BONDS: U.S. bond prices dipped,particularly long-dated bonds FOREX: The dollar gained against the yen and euro