J.P. Morgan: Don't Confuse Dovish Comments On Rates With "Tapering"

This was the gist of Bernanke's statement on July 10th.

MNI: "We've said that we will not raise interest rates at least until unemployment hits 6.5% as long as inflation is well behaved," but, he stressed, "again, as I've said before, that 6.5% is a threshold not a trigger. There will not be an automatic increase in interest rates when unemployment hits 6.5%."

Rather, Bernanke said, "given weakness in the labor market - the fact the unemployment rate probably understates the weakness of the labor market - and given where inflation is, I would suspect it may be well some time after we hit 6.5% before rates reach any significant level. "

"So again, the overall message is accommodation," the Central Banker said. "There is some prospective, gradual, possible change in the mix of instruments - but that shouldn't be confused with the overall thrush of the policy, which is highly accommodative."

Even though the Q&A came across as quite dovish, J.P. Morgan's analysts are convinced that the Chairman was referring to the Fed Funds target rate only. The Fed is giving itself room to keep the overnight rates low even if the unemployment rate dips below 6.5%. When it comes to securities purchases on the other hand, according to J.P. Morgan, the pace of purchases will begin declining after the September FOMC meeting.

J.P. Morgan: We heard those comments as dovish on the outlook for interest rates, but doing little to counter the notion that tapering will occur relatively soon. In some ways his comments echoed those from earlier in summer and spring: distinguishing the asset purchase policy from the zero rate policy, and emphasizing that decisions on one policy won’t necessarily impact decisions on the other policy. However, this week his remarks went further, by laying out the reasons why rates won’t rise dramatically in the medium term.
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Nothing in this week’s developments led us to question our view that tapering in September is coming, conditional to the data cooperating.

Here is J.P. Morgan's forecast for the Fed's securities purchases over the next 12 months.