By just talking about adding stimulus at a slower pace, Federal Reserve Chairman Ben S. Bernanke sent bond yields a percentage point higher. The rout serves as a warning to monetary policy makers that their exit from record accommodation won’t be easy to control.
The jump in yields has pushed up the cost of mortgages for millions of Americans, curbed demand for homes and prompted thousands of job cuts at Bank of America Corp. and Wells Fargo & Co., all at a time when the Fed’s policies are aimed at creating jobs and supporting housing.
Bond traders aren’t convinced by Bernanke’s efforts to divorce tapering from the Fed’s interest-rate outlook. Traders are suffering the worst losses in Treasuries since at least 1978, and they’ve lifted their outlook for short-term rates.
The minutes from the FOMC’s July 30-31 meeting reveal central bankers’ concern about the market’s reaction to a potential reduction in stimulus. They describe volatile financial markets in response to “policy communications” and economic data.
“Things moved more rapidly than the Fed was anticipating or might have desired,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. Policy makers have come to realize that their communications on tapering act “as a signal this whole exit process is getting under way.”