Fed wants to exit QE but keep long-term rates low Dilemma may keep central bank from tapering at upcoming meeting

WASHINGTON (MarketWatch) — The Federal Reserve, already exhausted after a year of missteps in the spotlight, has one last trick to pull off before it exits the stage — getting out of the controversial bond-buying business without causing long-term interest rates to soar.

“The Fed wants to gracefully exit [quantitative easing] while holding down bond yields for another year,” said Avery Shenfeld, chief economist of CIBC World Market.
The Fed hasn’t settled on how to do this — several ideas seem to be under active consideration — and this could delay any taper of its $85 billion-a-month bond purchase program until next year, Shenfeld said.

Mark Gertler, a New York University economist who worked closely with Fed Chairman Ben Bernanke, agreed with Shenfeld.

He said U.S. central bankers already think long-term interest rates are higher than they should be at this stage of the recovery.

“They are trying to pick the right stage of the recovery” to taper, and where interest rates are is a big factor, Gertler said.

The labor market remains weak and inflation is well-below target, Gertler said.
The yield on 10-year Treasury notes spiked this summer when markets believed Bernanke was signalling an imminent tapering.

Although yields have come down since the initial alarm over tapering but have not returned to prior low levels.

Lou Crandall, chief economist at Wrightson ICAP, said the Fed is struggling to communicate because the bond-buying program is an experiment.

“They can’t provide more clarity,” he said.

The central bank has been surprised at what has attracted the spotlight and moved markets throughout the three rounds of asset purchase programs, he noted.

Fed officials have spent the last few months explaining the misstep. Signs of fatigue are beginning to show.

“If the members of the [Fed’s policy making committee] could manage to get themselves to once again be thought of as humble, competent people on the level of dentists, that would be splendid” said Richard Fisher, the president of the Dallas Fed, in a recent speech, paraphrasing John Maynard Keynes.

By Greg Robb, MarketWatchow