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Bernanke: QE3 Will Continue for Another Year

Breathe a sigh of relief, investors: There will be no Fed tapering anytime soon.

That was the main takeaway from Ben Bernanke’s monthly press conference today. The Federal Reserve chief gave a rather glowing review about the U.S. economy’s growth, projecting that that see the economy “continuing to grow at a moderate pace” despite some headwinds. However, it’s not growing fast enough for the Fed to pull the plug on QE3.

According to the FOMC’s projections, the unemployment rate will dip to between 6.5% by the middle of 2014. When that happens, the Fed will likely stop buying $85 billion per month in mortgage-backed securities and Treasury bonds. Interest rates, however, are likely to remain near zero until 2015.

In other words, not much has changed. Tales of the Fed “tapering” off its quantitative easing were grossly premature, it turns out. That word, uttered by Bernanke himself last month, has scared a few investors off in recent weeks. Even with those fears allayed for the time being, stocks continued to fall after today’s announcement, dipping almost a full percentage point in the 45 minutes after Bernanke took the stage.

The pullback is likely a mini correction after stocks advanced each of the last two days. Indeed, the S&P is back to where it was to where it was at the open on Friday.

Other highlights from Bernanke’s conversation with reporters today:

  • Bernanke singled out the housing sector, which he said is now a support to growth. “People are more optimistic about housing,” Bernanke said.
  • The inflation rate should eventually move back to 2%
  • The 6.5% unemployment rate is a “threshold, not a trigger.” In other words, QE3 won’t automatically cease once the rate hits 6.5%.
  • Bond-buying purchases will begin to taper off (there’s that word again) in early 2014, but likely won’t come to a complete halt until the middle of next year.
  • If the unemployment rate doesn’t drop to the Fed’s expected 6.5% to 6.8% next year, the FOMC will “adjust its policies from there,” Bernanke said.
  • The downside risks to the labor market have “diminished” since the fall.