On Wednesday, Federal Reserve Chairman Ben Bernanke announced the Fed may begin pulling back stimulus later in the year and ending in 2014 if the economy continues its improvement. And the markets responded to Bernanke: The Dow finished down roughly 200 points for the day.
Morning Joe economic analyst Steve Rattner joined the show on Thursday to discuss Bernanke's announcement and why reducing the Fed's quantitative easing is like "taking an addict of his Methadone."
"What we are arguing about here or talking about rather is the Fed's bond-buying program called quantitative easing, where they have been buying bonds," Rattner said. "So we have a chart that basically illustrates this. If you go back to before the financial crisis, the Fed owned something less than a trillion dollars of bonds, mortgage bonds, treasuries and so on. During the crisis they have been buying heavily and now they are up to something like 3.5 trillion dollars of the stuff. In the first quarter of this year, the Fed bought 80% of all the new treasuries that is were issued. This is what people call printing money, this is what the Fed does when it can't push interest rates down further and wants to stimulate the economy. What got the markets going yesterday was Bernanke saying the time could be coming where we are going to stop buying in the fall perhaps or taper down buying in the fall and stop buying next year. Why did he say this? He said this because they have a somewhat more optimistic view of the economy.
"Here's a chart to give you a flavor for what the economists are looking at, which is projected monthly job growth...Now, we know the economy is still not doing everything we want, but over the past year private economists have gone from predicting something like 140,000 jobs a month over the coming year and now predicting something like 183,000 jobs a month...This is not great. we'll have high unemployment for another six to seven, eight years, but the point is the outlook is getting better. The Fed made projections a little more optimistic yesterday. So Bernanke is now starting to talk about reducing this bond program. it is like taking an addict off his Methadone. it's a withdrawal process."
"The bond market doesn't like that. And you can see on the next chart what's happening to interest rates because Bernanke is hinting at this. He hinted at it back in early may; He hinted at it again late in May. Then you have yesterday, and over this period of time, treasuries have gone from 1.6%, 1.6% to about 2.5%. and for the average American, this has consequences because the 30-year mortgage rate has gone from 3.35% to about 4%. and it will keep going up."