Bernanke Just Gave His Clearest Remarks Since The Taper Talk Began, And Markets Are Loving It

REUTERS/Jim YoungU.S. Federal Reserve Chairman Ben Bernanke listens to his introduction prior to speaking at the Regional Leaders Issues Conference in Washington at the Library of Congress in Washington, June 13, 2006. Ben Bernanke is commenting on monetary policy following the speech he just delivered at the NBER conference in Boston this afternoon.

The Federal Reserve chairman is striking a decidedly dovish tone in the Q&A, and investors are buying Treasury futures in after-hours trading.

His remarks help to clear up the confusion that has gripped the bond market in recent weeks.

The gist is this:

Just because the Fed may begin tapering soon, interest rates will still be pinned at current ultra-low levels for a long time.

Bernanke said that the unemployment rate – a key indicator that will determine the future path of Fed monetary policy – probably understates the weakness in the U.S. labor market.

That the onset of tapering should not be taken as a sign of an imminent rate hikes is something that the Fed has communicated in various ways, but has not spelled out this cogently or forcefully.

Two other points that Bernanke really drove home hard:

1. The 6.5% unemployment threshold is not a trigger for rate hikes, and the Fed could still keep rates at basically zero for quite some time after the economy hits that level.
2. The rise in rates that have come about lately represent a tightening of financial conditions, and to the extent that this rate rise threatens the economy, it will be addressed.

Bottom line: No rate hike for a long time, and the interest rate spike is of some concern to the Fed.

Stocks and bonds are soaring in after-hours trading.

The chart below shows the reaction to Bernanke's comments in 5-year U.S. Treasury futures (the 5-year sector comprises the Fed's biggest holdings of Treasuries).

Thinkorswim

And here is the reaction in S&P 500 futures:

Thinkorswim