Audio Transcript

Mark Hamrick: I am Bankrate.com Washington Bureau Chief Mark Hamrick. For only the second time this year, the Federal Reserve Chairman, Ben Bernanke, has held an official news conference in Washington. It came after the central bank issued a statement essentially staying the course with record-low interest rates and monthly asset purchases, all aimed at boosting the economic recovery. What was most remarkable perhaps is that Chairman Bernanke described a scenario where the Fed may begin to scale back asset purchases later this year. He was cautious in saying the decision is dependent on continued improvement in the economy. That revelation came during the chairman’s own news conference. We should note that the Feds outlook for the economy, whether looking at it from a gross standpoint or unemployment is slightly improved from March. Joining me now is Greg McBride, who is a chartered financial analyst.

Greg, what grabbed you about this FOMC meeting statement and the chairman’s news conference?

Greg McBride: Well for one, it seemed to me like they were backpeddling a little bit from his congressional testimony, where under questioning he indicated that the tapering — the dialing back of this monthly stimulus — could begin within the next few meetings. Instead today what he did was described what I think was a perfect scenario under which it could start later this year. Now, it must be said that the Feds track record here isn’t real good. They have overestimated the economic performance time in and time out. Also, when we look at each of the last three years, the economy has tended to hit a soft patch in the middle third of the year. So I think it’s anything but a foregone conclusion that the Fed will indeed start to taper that stimulus later this year. I mean, after all we’ve got to dot all the I’s and cross all the T’s in terms of economic growth and continued job growth in the interim.

Mark Hamrick: Well to be sure Greg, but let’s just say if the Fed is truly in a transition right now, where it will scale back and perhaps even end asset purchases next year, as Bernanke described, hypothetically. What does that really mean for the rest of us?

Greg McBride: Well when the Fed does start to taper and even when we get close to that, what you are seeing now is an increase in long-term interest rates that are a reflection of that. Prior to today’s meeting, we saw about five-eighths of a percentage point increase since his May Congressional testimony. We saw another 10 to 15 basis points today, after his press conference. So we’ve seen quite a runup in long-term interest rates reflecting the fact that when the Fed does start to taper, it’s going to clearly let some air out of that bond market bubble. I don’t know that you are necessarily see rates skyrocket when they stop — as they dial back and eventually stop that stimulus, but nonetheless rates have been as low as they’ve been in a large part because the Fed has been in the market in a very big way.

Mark Hamrick: And of course, Greg, we differentiate between the rates that the Fed can literally set and those that are in the marketplace, which you were referring to there. In terms of what the Fed can have a direct impact on the so-called federal funds rate, most FOMC members are really going to see a change there for a couple of years. So does that mean that we can essentially continue to bank on very low rates that consumers and savers see?

Greg McBride: Yeah, good news for borrowers, bad news for savers. Those short-term interest rates aren’t going to go up for probably another couple of years and even Bernanke was pretty clear about that today. But that means that the beatings will continue for savers that you are not going to see any kind of improvement there. But the flip side of that is for borrowers — credit card rates, home equity rates, auto loan rates — those rates will continue to remain at very attractive levels, conducive to borrowing and spending, which is needed to jump-start the economy.

Mark Hamrick: Greg, a lot of heads were turning earlier in the week when President Obama was asked by Charlie Rose whether he might reappoint Bernanke to another term — his current term as chairman, of course, ending in January. And the president basically said that Bernanke has been here longer than he wanted to be and longer than he was supposed to be. That seemed to a lot of people to be a bit abrupt and then Bernanke was asked about that at his news conference. Essentially, where he wouldn’t have any part of reporters’ questions whether he’s as good as gone next year — does any of that really matter to the rest of us, assuming the president appoints what might be considered a well-qualified successor. What do you think?

Greg McBride: Well the Fed chairman is, I would argue, more significant to pocketbook issues for most Americans than the president himself. So exchange in the Fed chairmanship is a big deal. Now the news, or lack thereof, about Bernanke and his possible departure when his term ends in January is not exactly what I would call a well-kept secret. I mean all the tea leaves — everything — has kind of pointed in that direction that he really didn’t have any appetite to stay beyond January, and even though he hasn’t come right out and said it, all indications seem to point that way. And by what the president said on TV the other day really validates that.

Mark Hamrick: Thank you, Greg. I have been speaking with (Bankrate’s) senior financial analyst, Greg McBride.

Mark Hamrick: And now, a broader view of what the Federal Reserve has been doing with its monetary policy. The Fed has said that record-low interest rates will likely be a fact of life for some time to come having targeted an unemployment rate of 6.5 percent. So-called quantitative easing has been the near term wild card in Fed policy. Again, that’s the monthly purchase of $85 billion in bonds, dubbed QE3. I spoke earlier with Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Mass. I asked him about the effectiveness of Fed policy under Chairman Ben Bernanke.

Paul Edelstein: Low interest rates help the economy because they make borrowing costs small and they help homeowners refinance their mortgages, which frees up some cash to spend on other things. But I think another important point to keep in mind is that the low interest rates are indicative of a very weak economy and expectations for a weak economy to persist. So if people were optimistic in the outlook, then what we would see is interest rates actually move higher, as investors move out of the safety of bonds and into riskier assets such as stocks. We’ve seen that of course over the past few years, periods where interest rates did move higher. Most recently since the Fed started doing quantitative easing — the third event of quantitative easing back in September.

Mark Hamrick: What has been the additional, let’s say incremental, benefit of quantitative easing beyond the low interest rate impact?

Paul Edelstein: Well it’s supporting the economy by increasing the money supply and raising expectations for working on the gross inflation, which has an impact on consumer and investor behavior in the here and now. So if everyone start to think there is more growth and more inflation, what they are going to do is they are going to start to spend currently to get a head of it. And they are going to shift their investment portfolios in a certain way.

Mark Hamrick: I tell you, we seem to be coming into the final months of the Ben Bernanke era — what do you think his legacy will be?

Paul Edelstein: I think he put a floor under the economic crisis by doing a few things, one by standard levers of monetary policy and by undertaking some extraordinary measures, such as quantitative easing; but also supporting the banking system through a lot of the lending facilities, liquidity facilities that he instituted back in late 2008 (to 2009). So I think he’ll probably be credited for preventing a worse situation. But I think when it comes to the recovery part of this past business cycle, I think there is going to be a lot of controversy about Bernanke’s legacy.

Mark Hamrick: And then we come upon these transitions from one Fed chair to another and there tends to be a lot of virtual hand wringing in the financial markets — how difficult is that transition going to be?

Paul Edelstein: I do not think it is going to be particularly difficult in this situation. The reason is there is someone waiting in the wings, who is very similar to Ben Bernanke. And all indications are that this person is going to take over and probably continue the current policies.

Mark Hamrick: And that would be Janet Yellen?

Paul Edelstein: That would be Janet Yellen, absolutely.

Mark Hamrick: How may she differ from Ben Bernanke?

Paul Edelstein: It’s really hard to tell, I mean there are some indications that maybe she’ll be a little more dovish than Ben Bernanke and might want to actually provide a little bit more support to the economy than Bernanke would in 2014. It really depends on where the economy is at that point. On the other hand, there is this notion that new Fed chair people want to demonstrate their inflation-fighting credentials and it actually sometimes holds them back a little bit. It’s really hard to tell.

Mark Hamrick: Paul, thanks so much for your time.

Paul Edelstein: You’re welcome.

Mark Hamrick: Paul Edelstein, he’s the director of financial economics at IHS Global Insight and earlier I spoke with Bankrate’s Greg McBride. You have been listening to a podcast coming to you from Bankrate. I’m Washington Bureau Chief Mark Hamrick. For more on this and other personal finance issues, visit Bankrate.com. Thanks for listening.