Bernanke called attention to several different forecasts of where the 10-year yield might be a few years down the road, including the Blue Chip consensus, Survey of Professional
Forecasters, CBO, and the term-structure model that was used to construct Figure 1 above.
Source: Bernanke (2013).
I was quite surprised to see the Fed Chairman produce this graph. If it is indeed the case that the 10-year yield is going to rise from 2% to 4% relatively quickly, it would mean significant capital losses for someone who buys a 10-year bond today. If the market comes around to taking such forecasts more seriously, bond prices should fall on Monday.
However, Bernanke also emphasized that there is considerable uncertainty associated with these forecasts, on the down side as well as the up side.
Source: Bernanke (2013).
Bernanke offered the following explanation for why he wanted to call attention to forecasts of future ten-year rates:
"It is worth pausing to note that, not that long ago, central bankers would have carefully avoided this topic. However, it is now a bedrock principle of central banking that transparency about the likely path of policy, in general, and interest rates, in particular, can increase the effectiveness of policy. In the present context, I would add that transparency may mitigate risks emanating from unexpected rate movements."
Bernanke is clearly committed to keeping short-term interest rates low for quite a while yet. But a separate question is how much more the Fed wants to allow its balance sheet to grow with additional large-scale asset purchases. I think they'll want to give ample warning in advance of actually stopping the new purchases.
And perhaps before dropping more direct hints about ending LSAP, Bernanke would want to make a speech like this one.
(emphasis added)
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