Fed went too far, say analysts

By Staff, with files from The Associated Press | June 25, 2013 | Last updated on June 25, 2013
2 min read

The Fed will learn from the distress it caused investors with last week’s word of a likely pullback in bond purchases this year, says Mark Zandi, chief economist at Moody’s Analytics.

“They went too far and too fast,” he adds. “The lesson for them is to move more incrementally with regard to their communications.”

Read: Don’t fear the end of Fed QE

Many agree with Zandi. As Reuters reports, Bernanke revealed more than usual at his post-meeting conference, sending markets into a tailspin. It adds one Fed director questioned whether Bernanke should lead such conferences. Read more.

In light of how markets reacted to last week’s announcements, most economists say the administration will strive to avoid any surprises in its handling of Bernanke’s expected exit.


Deciphering the Fed’s announcement

Updated: Fed maintains QE, optimistic about U.S.

Bernanke may step down in January, though he hasn’t yet announced his departure.

And by that time, financial markets will likely be absorbing a pullback in the Fed’s bond purchases, a fact revealed by the Fed after last week’s FOMC meeting.

However, it’s expected undergoing another major transition will put further strain on the U.S. economy.

Read: What to do when interest rates rise

Among several possible successors, most Fed watchers think the leading candidate to replace Bernanke is vice chair Janet Yellen. As the new leader of Fed, analysts say she’d likely aim to carry on Bernanke’s policies.

“We know for sure now that Bernanke is a lame duck,” says Sung Won Sohn, an economics professor at California State University. “The leadership change at the Fed will add to the uncertainty in the markets.”

The possible overlap between a Fed pullback in bond purchases and a new chairman “will compound the uncertainty and possible market volatility,” adds Brian Bethune, an economics professor at Gordon College.

Read: Think twice before dumping bonds

Yellen is seen as a comforting choice, given that she’s considered a like-minded Bernanke ally who has held the second-place post at the Fed since October 2010, says Diane Swonk, chief economist at Mesirow Financial.

Yellen also led the Fed’s communications committee, which recommended many of the changes the central bank has made to make the Fed more publicly transparent.

“Investors are fully anticipating that Bernanke will leave when his term is up and that Yellen will succeed him,” Zandi says. “If that happens, I think there will be a smooth transition.”

That said, some are hoping President Obama will convince him to stay another term to ensure a solid recovery and transition out of QE.

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Staff, with files from The Associated Press

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