The Guest Blog

Crescenzi: Fed Is in 'Watchful Waiting' Mode

In his June 22 press conference, Bernanke indicated implicitly that the Fed could increase the average maturity of its holdings when he said, “We could, for example, do more securities purchases and structure them in different ways.”

Therefore, one of the more important passages in today’s (Wednesday's) testimony is not just the reference to the Fed possibly increasing the average maturity of SOMA (because the reference was previously made), but the implicit yet clear reference to and acknowledgment of the lagged effects of monetary policy, which reinforces the idea that the Fed is in a “watchful waiting” policy mode.

The minutes of the June 22 FOMC meeting reinforce this idea, with a "few" members seeing the possibility of a need for more accommodation balanced by a "few" that believe conditions might evolve toward a need for an early exit from the current policy stance, leaving the bulk of members in a "watchful waiting" mode.

Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)
Dennis Cook

Here is the passage from today's testimony containing the implicit reference to the lagged effects of monetary policy, which is largely contained in Bernanke's second sentence:

“Although we are no longer expanding our securities holdings, the evidence suggests that the degree of accommodation delivered by the Federal Reserve's securities purchase program is determined primarily by the quantity and mix of securities that the Federal Reserve holds rather than by the current pace of new purchases. Thus, even with the end of net new purchases, maintaining our holdings of these securities should continue to put downward pressure on market interest rates and foster more accommodative financial conditions than would otherwise be the case.”


Tony Crescenzi

Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."