After 97 years, the Federal Reserve held its first press conference. Experts say Wednesday marked a turning point for the Fed in its effort to become more open to the public.
On the docket was the Fed's controversial second round of quantitative easing—known as QE2—in which it's buying up $600 billion worth of treasury securities to push interest rates lower, stimulate lending, and spur economic growth. Critics say the Fed is creating inflation, most recently seen in the form of higher oil prices, in different parts of the world. But proponents say the Fed needed to intervene in the bond market to help a slow-to-recover economy in the United States. Now the Fed has made its argument. Here are nine things we learned from Fed Chair Ben Bernanke:
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1. The Fed is trying to be more transparent. At times during the press conference, its language was still difficult to parse, but the Fed has come a long way. It wasn't until 1994 that the Fed even began releasing statements about its decisions to raise or lower interest rates. "They're trying to communicate better with the public," says Brian Gendreau, market strategist with Financial Network, a Califonia-based financial advisory firm. That's partly because the Fed has faced a lot of criticism for its latest QE2 program, he adds.
2. QE2 will end as scheduled. When the Fed initiated QE2 in November, it said the program would be reviewed on a regular basis and would probably end in June. That end date was cemented on Wednesday.
3. A third round is unlikely. What happens after June remains up for debate, but there was no mention of plans for a third round of quantitative easing. "The door hasn't completely been shut, but there is certainly not an expectation of QE3 by the Fed at this point," says Brad Sorensen, director of market and sector analysis for the Schwab Center for Financial Research.
But just because the Fed will stop buying new treasuries doesn't mean the process is over. The Fed still has a huge balance sheet full of government securities, and it will have to decide how long to continue reinvesting the proceeds—or interest payments—from its prior purchases. "It's going to live on," says Bill Larkin, fixed-income portfolio manager at Cabot Money Management. Larkin says there is no clear indication whether the Fed will begin a new round of easing, in which it would purchase more securities, but it will have to decide what to do with its current balance sheet.
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4. Don't blame the Fed for higher oil prices. Bernanke acknowledged that higher oil prices are becoming a larger concern, but he essentially said the Fed doesn't have any control over the price of gas. "The Fed has pretty consistently maintained that they're not responsible for higher fuel prices," Sorensen says. The Fed has repeatedly called surging gas prices "transitory"—in other words, a short-term phenomenon. The Fed focuses on core inflation, which strips out food and energy prices. The Fed said its projection for core inflation this year is between 1.3 and 1.6 percent, still below its stated goal of around 2 percent.
5. Don't expect a rate hike soon. The Fed didn't hint at plans to raise interest rates in the near future. While other nations, like China and even the European Union, have raised rates recently, the Fed remains focused on keeping rates at virtually zero, where they have been for more than two years. "You can find people who say the Fed won't raise rates until 2013," says Walker Todd, a research fellow at the American Institute for Economic Research and 20-year veteran of the Fed Banks of New York and Cleveland. That's bad news for savers and retirees, he says, who are currently earning pennies on the dollar in savings accounts. They won't see any relief until the Fed begins raising interest rates again.
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6. The recovery is here, but it's fragile. The Fed said the economy is recovering at a "moderate" pace. It lowered its GDP forecast for this year somewhat, from between 3.4 to 3.9 percent to 3.1 to 3.3 percent. The Fed blames the lower projection on a combination of factors, including harsh winter weather and unrest in the Middle East. Those concerns contributed to Thursday's first-quarter GDP numbers, which showed that the economy is growing at a sluggish pace of 1.8 percent.
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