monetary stimulus, too, but he has to express confidence to be able to do but the the morphine drip of monetary policy without stimulus. >> a few seconds to go until we're about to get the fed announcement. steve liesman is at the fed with the announcement. steve liesman? >> no taper in the statement today. the fed saying the downside risks for the labor market and the economy have diminished, perhaps setting the stage for tapering. there were two dissent, one from the hawkish side and one from the dovish side, one from george and one from bullard. let's get to the details now. the economy seemed just like it was last time, expanding at a moderate pace, a slight tweak to the gdp forecast. back to that later. the labor market upgraded just a touch, seen as further improving rather than some improvement and same concern about the unemployment rate, the unemployment rate remaining elevated. you'll see in the forecast a little more aggressive decline

in the unemployment rate anticipated by the federal reserve, spending, household and businesses seen advancing and howing strengthened further as they said last time. inflation somewhat below the long-term objective and that inflation forecast came down by a strong half point in 2013, seemed to be accelerating next year. downside risk, seen to the outlook and to the economy and labor market as having diminished. that's a big change to the statement. inflation, however, over the medium term is going to run at the objective of 2%. they kept with the purchases of $40 billion of mortgage-backed securities, $45 billion of treasuries still reinvesting, until when, until the labor market has improved substantially. same language, prepared to increase or reduce the outlook for the labor market as inflation -- as the labor market or inflation changes. the committee will also take account of efficacy and costs and the highly accommodative stance is appropriate until after the purchase ends, and they kept those same benchmarks, 6.5% on unemployment and 2.5% on

inflation. on inflation, take a look at these graphics now. you'll see that for 2013 they are looking for headline inflation of 1%. that's a half point below the prior forecast in march. there you go right there. now, it seemed reaccelerating pretty sharply, 1.7, 1.8, the unemployment forecast has come down by 0.15 basis points to 7.25 for this year, 6.65, down by two basis points and 2016 is when we hit 96%. somewhere between 2014 and 2015 you might expect the fed to hit 96% and raise rates. no taper this time around. maybe setting the stage for next time by saying the risks, the downside risks have reduced and jim bullard saying the fed is not taking an appropriate enough account of its inflation adjustments. it's been a while, guys, have to

go back to look at my history books, two dissents, two dissents from different sides of the coin. back to you. >> steve, you know, sometimes the news is what people do. it appears the news is what the fed did not do which is reduce its taper. it looks like that 85 billion will continue on. that's what we were looking for, reduction, and your reaction? >> i guess -- my reaction is it's what i expected. it's what i expected. didn't think it would happen this time around, and -- >> others did. >> it looks like we may be on a course -- well, i think they were wrong and they were listening to the wrong reporters on the list, you know what i'm saying? >> it's kind of interesting, just watching the market reaction, for people -- >> mandy, let me make this one point, that i think we may be on a trajectory that the market could possibly understand from here which is the idea that the economic and labor market risks have diminished. it exos language we've seen in the past of forecasting what the

next statement might say or what the next movement might be, so i think they have set the stage for some flexibility on tapering here, and we're back on a path that remintz minds people of how the fed made policy a couple years ago. >> just for the people who might be listening in on the radio because we're not just tv here. here's the market reaction. the equity markets have taken a turn for the worse. gold is also moving down. the u.s. dollar index, the dxy, is spiking higher. bob pisani kind of warned us of this earlier on this morning, david kelly. he was saying, unfortunately, traders might spin everything negatively. if they get clarification on taper, they might spin that negatively. they don't want that, but they also might spin no talk of taper negatively because they were gearing up for taper. is this a case of them spinning it negatively in an unwarranted fashion? >> i don't think people expected any actual taper, i agree with steve, but what's interesting is when they say risks have diminished, that surprises me a little bit. i think they have but i'm

surprised they said it and a combination of saying risks have diminished and lowering the forecast for unemployment says that the end of tape serg coming. remember, we've got a very extreme monetary policy here which can only really be justified if you've got an extremely risky environment. if they say the risks are coming down, the justification for continuing qe comes down, too, so i agree that this is forecasting perhaps some tapering later on down the road. they are trying to get people used to fact that, look, we have to get back to a normal monetary policy. >> what's normal monetary policy? does anybody remember? >> that's a long way down the road. >> if you listen to kyle bass and fair disclosure, a friend of mine, if you look at total debt to gdp, it's 360% globally, $10 trillion printed, credit added over the last decade, trillion with a "t." all right. i think that we're trying to make light of the fed's job here in backing out of this. >> well, you know, i think

there's a larger issue, too, and i think steve made it. one is the diminishing risk issue that they are setting the stage. the issue of the two dissent. charlie evans was the last one to do a dissent in the other direction to be more dovish and to see bullard, the one who wanted open-ended purchases and the difficulty in conveying what that actually means to the markets, when it's open-ended, how do you end it rather than saying 600 billion like they did with the qe2 so that was interesting. the other issue, the sleeper issue, the decelerating inflation issue and as steve pointed out, diminished risks and decelerated inflation is not something that they welcome and something that some at the fomc are concerned about and that's part of the reason why bullard obviously dissented. >> let's get a reaction on what's happening -- >> brian, brian -- >> quickly, let's find out what's going on on the bond side of things. rick santelli, we do have quite a bit of movement going on there in the ten-year. what do you make of this? >> let's start with the 2s and what you'll notice, intraday two-year, got up to 29 basis

points, but it was a slow burn. five years didn't move for a while, but then they jumped up to the 1134 13. all the action was in the long end. that ten-year note yield jumped up to 227 moments before the statement, and now we're back up there after going back down to 220, and the 30-year long bond, which should be the most volatile, really lived up to its reputation now hovering just under 3 hadn't 40. the dollar indexed from down to 5 up to close to a quarter of a cent, but it doesn't look like the different currencies, youro, yen, pound, though weakened was the battlefield. you walk away thinking that the market is still looking for less accommodation in some form. if we close above 2.23 and 10s, probably look for momentum to the downside and price upsiding yield, so say traders. >> indeed. okay. we'll get to bob pisani for the equity side in just a moment. in fact, we're watching the dow take a leg down. down about 60 points or 55 as we

speak, but steve liesman, you wanted to just say something a moment ago. what was it? >> yeah. it's important for the market to recognize, and i think it does, that the size of the sponge that's needed as relative to the size of the spill. brian was talking about the amount of total government issues that's out there but that number for the united states is coming down so the fed's relative impact at 85 billion will become even less. >> exactly. >> could remain the same as the amount of treasuries being issued is brought down. >> there's a lot -- the debt is coming down so rapidly, it really does. that's another issue they have to deal with. they are buying almost all of the agency debt that's coming out right now in mortgage-backed securities so there's an issue of how much they can buy wows distorting markets so that's sort a subtext of what we're seeing. >> we're heading into a weakened economy, right, ism, philly fed, durable goods.

look at a multi-year chart of those three things, david kelly. they are all coming down. >> no, i think the economy is fine. i mean, remember the amount of fiscal drag. look at real consumer spending, growing at about a 2% to 3% pace in the first half of the year. that's great if you're bringing the deficit down. we've got a lot of fiscal drag and the economy is dealing with that. i think we're seeing good numbers on housing. i think we're seeing good numbers on consumer spending. everything is not right in business or manufacturing, i get that, there's a lot of weakness in the world economy, but overall the economy is absorbing a huge amount of fiscal draug drag right now. i think it's powering through that, and i think it's actually got less to worry about.right n. i think it's powering through that, and i think it's actually got less to worry about. >> it's a very big footprint. >> something that's very important to remember. >> just to reiterate, there's no explicit indication from the fed

that it's close to scaling back its bond-buying program. bob pisani, the markets have been moving lower on this. currently i think the dow is down about 70 points. what is it in particular that traders say that is pushing them down? >> you know, i said earlier. it's easier to predict what mr. bernanke is going to say than how the markets will react and a lot of traders felt this morning that no matter what happened the market would be down, at least initially. the close might be different but at least initially because there's been big moveups in the last couple of days on hopes that mr. bernanke would be more dovish. some people feel that statement being more dovish in itself could be reasons to sell. could be reasons why we're down, no matter what happens. you see us down to the downside here. remember what happened on may 1st. the real big moves happened on may 1st at the last fomc meeting and since then the s&p 500 has been up. there's market since may 1st. s&p up, bond markets down. bond markets moved down again on this announcement but the long-term bond market down

significantly. >> bob? >> yeah, steve. >> can i push back and say, hey, i'm telling you, the fed is saying downside risk to the economy and the jobs are diminished. we'll have lower unemployment and lower inflation, probably the same growth and maybe a little less qe in the coming months. is that really so negative for stocks at the end of the day? >> that's a great point. >> i don't think it's negative for stocks at all. i simply think the market has gone up in the last two days rather dramatically and i think a lot of people have been planning for a comment like this. >> collapsed back to the lows of 11:00. >> still near record highs. >> i think the record highs are the important part. >> still near record highs, so david kelly, from heer where does the market go and what takes us on the next leg higher or lower? >> well, i think the earnings reports that we get in july i think will be important in determining the next round of what we get from the market. as rates go, the markets will

have jitters. can we survive with rates at 2.5% and can we survive with rates at 3%? i think there's going to be a wall of worry accompanying rising rates and then what we'll see is the economy can take it and if the economy can take a t and earnings are still growing, the markets will go higher. over the next year the markets will go higher even though interest rates will go higher substantially over the next year also. >> define higher. >> don't say, david, above where they are right now. believes. >> will we have a 3% bond yield by the end of the year? >> i think we'll be above 2.5%. i think sometime in the six months between the -- the last few month of this year and first three months of next year i think we'll come close to 3%. >> david, can bond yields rise and stocks also rise, or must stocks fall? >> what we found historically is when rates are believe 5%, ten-year below 5% and moves up, generally a sign of an improving

economy and economic optimism and the market reacts positively to that. when you have high rates, got 8% or 9%, ten-year treasury yield and it guns, then you've got an inflation problem and fed tightening problem but when rates rise from very low levels it doesn't tend to hurt the stock market. >> let me jump in here real quick. a couple other things traders down here talk about and that as s as rates start to move higher nao even in a managed rate type of environment the self-adjusting mechanism of throttling things back may keep a lid on rates. many traders don't think we'll do a lot of work above 2.5. forget all the reasons you've heard about fed programs. when we had a $6 trillion deficit a number of years ago, our interest rate expense wasn't so much different than it is now, and when we have multiple times the 6 trillion in debt. the moral of the story is if rates normalize we go from 300 billion in servicing the debt to much, much more. maybe that's the discussion we should be having. >> and also, rick --

>> yeah, but, rick, what's the environment under which we normalize? if we normalize on interest rates, are we also normalizing on tax revenue? i mean works knows. >> and you have a much smaller deficit. >> i'm a market guy. not a fiscal guy. washington needs to take notice, you're right. i'm with you. >> okay, rick. >> you're the political guy, in my opinion. >> you're really a political guy. >> well, all i know you is can't have 300 billion of debt, of servicing debt at 6 trillion and then as you head to 18 think you can keep it the same, which they have, which is i think the real reason that we have so much quantitative easing going on. >> don't make me send you to bed without supper, boy, okay, because, you know, diane, bring a voice of calm reason in here with us, but i think it's an important question to ask. has the fed, in your mind, and there were some hints to this earlier this week that steve may or may not disagree with so he can rebut after you answer is which is this. do you believe the fed has

lowered its expectations or changed its definitions of what is t might consider good enough to stop the program and start raising rates? >> no, it hasn't changed. raising rates is still so far down the road, steve talked about the forecast on the unemployment rate and you're still talking about between 2014 and 2015 before the fed starts raising rates. this is still a fed that's willing to leave the punch bowl out a little long and maybe even let a few people get tipsy out there, and i think that's the message we'll hear from ben bernanke today, tapering or not, what they end up doing and how they end up calibrating the easing they are going to be doing right through the year, tapering is still easy monetary policy, like moving from a 1% cut in rates to a half% cut in rates and that's something that really ben bernanke's challenge today is to communicate that clearly. >> diane, do you think the economic movement is going to be sufficient in the next three months for the fed to make some definitive comments about tapering by september? i don't see it on a global level.

perhaps it will happen in the u.s. what do you think? >> the interesting issue is i think the u.s. economy will reaccelerate a bit but the headwinds of the sequester will also intensify. i wasn't expected the skywester to last the summer and into the fourth quarter and now i am which will limit my forecasts on growth. whether that's enough for the fed to taper, it is partially contingent on this other issue that steve brought up and that is the deficit is falling and the issuance of treasury bonds is going to be going much smaller than many people thought initial initially. >> the other thing here -- >> i've got to answer your question. >> everyone is talking -- everyone wants the final word, don't we. >> very quickly, steve liesman, final word to you. >> very important to answer bob's question. i do not think if the fed's forecast turns out to be correct of 7.25% unemployment by the end of 2013, i will say definitively you bet they will taper by december or earlier, or the fall

of this year f.that is the right forecast, you can guarantee they will be tapering down from 85 billion. >> there you go. >> fantastic. >> meantime, diane and david, thanks very much for playing, and in terms of what the market is up to right now, it's very interesting to point out that we've come off the knee-jerk lows after the fed decision, of course, just to explain. they are going to keep on buying their 85 billion in bonds per month, no explicit indication on whether or not they are even close to scaling back that program. at this stage the s&p is pretty much flat-lining, could even go positive, brian. we don't know within the next hour. we've got the news conference by ben bernanke at the bottom of the hour. >> i think it's clear we did collapse to the lows of 11:00 yesterday. okay. run for the hills, america. >> we've had two good days. >> only doubled since the market lows. >> s&p up 15% so far this year and a ways to go and still ahead, pimco's bill gross will be joining us with his take on today's decision.

>> and we'll count you down to ben bernanke's news conference. we'll take you live. i know steve and other reporters will hammer him with kweps questions. whether he answers them in a way we understand, you have to tube in to find out. stick around. ron: i'm never alone with scottrade. i can always call or stop by my local office. they're nearby and ready to help. so when i have questions, i can talk to someone who knows exactly how i trade. because i don't trade like everybody. i trade like me. that's why i'm with scottrade. announcer: scottrade- proud to be ranked "best overall client experience."

we are just moments away from ben bernanke's news conference and once it begins you can bet your bottom dollar, which by the way is gaining in

value every single moment, we'll take it live. meantime, let us bring you once again a friend of cnbc and "street signs." pimco cio and founder bill grossches we went into this meeting and decision thinking this was going to have a lot of significance and weight, perhaps the most weighty meeting in quite some time. do you think we got what we expected or was it a surprise to you, bill? >> no. i think it was what we expected, mandy. we'll learn for ten minutes, of course, but the tapering fear was always a result of ben bernanke's language in the last press conference where he, you know, spoke to the next few meetings perhaps if there was a substantial improvement in the labor market. ten minutes ago steve talked about what that level might be. is it 7.25%, which is the forecast of the fed, you know, at year end? you know, perhaps it is, but, you know, i think what the headline should be at this, you know, particular announcement is that tapering has been deferred. certainly, you know, it's not the next few meetings.

we're already one meeting into that, you know, type of playing out so, you know, perhaps by the end of the year, but certainly not in the next few meetings in mid-summer. >> was that the right decision? >> i think so. you know, we've had some disagreement with some of the negative aspects of quantitative easing, by think what the fed has tried to do with these hints, you know, that it can't go on forever is basically to suggest that there have been some speculative influence of -- influences of quantitative easing on asset markets. we've seen that in the high-need market. we've seen it in other risks markets. jeremy stein, you know, one of the governors has written about it, so, you know, the fed has had a delicate task of trying to reduce speculation, but at the same time maintain, you know, a low rate of volatility, very difficult to do, almost like juggling, you know, the very heavyweights, you know, in one hand or know, and so, you know, they have got a delicate task ahead, but i think that tapering

is at year end, and i think importantly, you know, that they spoke to the policy rate, you know, being maintained at, you know, a substantially low level, meaning 25 basis points. you know, until the tapering ends, until the asset ends and from that point forward a substantial period of time, so we're not looking in terms of the fed funds level until 2015 or beyond in terms of raising it, and that to me is the critical element for bond prices. >> who am i to disagree with bill gross? but i'm going to right now, bill, so listen up. >> all right. >> i'm going to push back what you said about the taper being deferred because the fed did change some language. here's what they said. the committee sees the downside risk to the outlook for the economy and labor markets as having diminished since the fall. they changed a couple of words in that bill. doesn't that signal to you that they have become a little more positive on the economy, and, therefore, might be dropping that sort of hint in the way

they do, that tapering will begin? >> well, i think they have. you know, the economy has done all right at 2% growth, plus or mineus, and i think the fed has to acknowledge -- have acknowledged that in terms of their forecast for 2014. you know, the critical element here, again, at what level of the unemployment rate, which is the -- you know, the number really that the fed is focusing in on in terms of tapering, as what level do they begin either that announcement or the actual tapering of purchases going forward? you know, i think it's somewhere around 7% to 7.25%. can we get there in the next month or two, decidedly not? probably in the fall, if things go well at 2% to 3%. if things don't go well, if we have problems in europe, if we have problems in japan or china, then all of a sudden we're back into the other camp of perhaps even, you know, increasing the purchases which i'm sure bernanke will emphasize at the press conference. >> so we've got a chart on the

wall here, bill, that i spent the afternoon painting up for you and you may not have a monitor, and i'm sure you know what this looks like. this is a shot of the ten-year bond yield which is in orange and it notes when qe1, 2 or 3 began. since qe1 was announced the s&p 500 is up 77% and the ten-year yield is down 44% and the divergins between the two has accelerated over the last 12 months. so my question is this. once interest rates begin to rise or qe is pulled back or both, if qe is pulled back, doesn't the stock market have to fall since it clearly rose in large part on it? >> well, that's our opinion, brian, and to rick santelli's point of a few minutes ago. we're in a highly levered economy, and it's not just the leverage or the interest expense of the government or the treasury. it's really the -- the expense of the household sector and

corporations, and to the extent that interest rates rises, let's just look at the mortgage market, to the extent that a 30-year mortgage rises from 3.5% to 4% which is basically what it's done, then housing certainly has to be affected. in a highly levered economy, where households basically can't afford to pay much more in terms of interest expense, then, you know, there are critical levels, and, you know, those levels are very tightly bound. it's not the same type of environment, as 5, 10, 20 years ago where you could raise rates and you could expect slowing. if you raised very suddenly and raise that had ten-year up to perhaps 2.5%, then the leverage -- >> bill, i hate to jump in on you. >> it becomes a problem. >> just very quickly, very, very quickly. where does the ten-year yield end up at the end of this year? >> i think at 2% or lower. i think ultimately, you know, the tapering is delayed. i think we're at a value zone in terms of treasuries and in terms of high grade corporate bonds

and mortgages, and, you know, we're a buyer here this afternoon as opposed to a seller. >> you're a buyer here this afternoon? >> yes. >> okay. >> it's interesting. did you hear the comments by jeff gundlack earlier today on "fast money" "halftime?" he said it's most likely to make money in the long term, u.s. government bonds. >> that would be our view, too. you know, we've had a bad may. the bond market has had a bad may and all bond manage verse had a bad may and we've moved from a level on the ten-year from 1.60% to now 2.25% or higher. you know, those types of yields are beginning to be attractive, and importantly, mandy, you know, beginning to suggest that the price declines that we experience in may, you know, probably are going to be limited in a potential for capital gains all of a sudden, you know, have increased, and, so, yes, it's a time to buy government bonds. it's a time to buy high quality bonds for, you know, short-term capital appreciation as opposed

to expectations of lawsuits. >> because you did say back in may that the bond rally was over, that owe sensingly the bull market in bonds was over, so you've changed your view on that, ben. >> well, no, i think that's true. i suggested at the end of april that basically, you know, the bond market had bottomed in terms of yield and that included not only treasuries but high-yield bonds and corporate bonds and that's been true. the end of a bull market doesn't necessarily mean the beginning of a significant bear market, and that's our point, that, you know, you can maintain these levels and get a 3% yield on the total return fund, for instance, with relative safety in terms of principal as opposed to, you know, the debacle that's being predicted in various news dailies on an almost daily basis, so, you know, the bond market at the moment doesn't look great on a minute-to-minute basis after this announce president, but like i said, we're a buyer as opposed to a seller. >> and, bill, i wonder if we're forgetting something huge which is the growing protests and rioting all over the developing

world including millions take together streets of brazil. does that not maybe eliminate the fed from the picture in the short term as people rush into the haven of treasuries? >> well, i think so, and the global situation has to be considered, even by, you know, respective central banks around the world. you know, to the extent that there are emerging market de-leverings, to the extent that currency ups and downs are on the move and very volatile, as evidenced by the japanese yen or instigated by the decline in the japanese yen, then, yes. global markets are levered, let's face it, and is that a good thing? probably not, but they are levered, and so central banks have to be very careful in terms of their tapering or in terms of their policy rate increases going forward >> you don't see any danger of a massive leveraging unwind like we saw back in, for example, you know, 2008, happening across the world? there's no danger of that happening in the next 12 months? >> we've seen it mildly, have we not, in may. >> yeah. >> and we're beginning to see

that in trouble spots with brazil. >> but as a significant global percussionwide de-leverageing? >> no, i don't think so unless central banks as a whole, you know, begin to ease back on the throttle substantially and we agree that the bank of japan and the fed in combination are buying about 1.8 trillion worth of securities a year out of an available supply of 2.2 trillion. they are buying almost all of it, so as long as they continue to buy it, you know, then markets should be supported, and the de-levering should be very gradual at all. >> good place to end. thanks as always, buddy. appreciate your time and now the fed chairman ben bernanke will begin his news conference. >> the two-day meeting earlier today, based on its review of recent economic and financial developments, the committee sees the economy continuing to grow at a moderate pace,

notwithstanding the strong headwinds created by current federal fiscal policies. the labor market has continued to improve with gains in private payroll employment, averaging about 200,000 jobs per month over the past six months. job gains, along with the strengthening housing market, have contributed to increases in consumer confidence and supported household spending. overall the committee believes the downside risks to the outlook for the economy in the labor market have diminished since the fall, but we will continue to evaluate economic conditions and risks as they evolve. inflation has been running below the committee's longer run objective of 2% for some time and has been a bit softer recently. the committee believes that the recent softness partly reflects transitory factors and long-term inflation expectations remain stable, the committee expects inflation to move back to the 2%

longer-term objective. in conjunction with this meeting, the 19 participants in our policy discussion, the seven board members and the 12 reserve bank presidents submitted individual economic projections. as always, each participant's projections are conditioned on his or her own view of appropriate monetary policy. generally projections of individual participants show they expect moderate growth picking up over time and gradual progress towards inflation consistent with statutory requirement and economic growth have a tral tendency of 2.3% for 2013 rising to 2.6% to 2.9% for

2014. 7.7% is the projected unemployment rate declining to 6.8% in the final quarter of 2015. most participants see inflation decreasing from its current low level. the central tendency of their projections for inflation is 0.8% to 1.2% pore this year and 1.6% to 2.0% for 2015. before turning to today's policy decision, let me say a few words about the federal reserve's strategy for normalizing policy in the long run. in the minutes of the june 2011 meeting the committee set forth principles that it intended to follow when the time came to normalize policy and the size and the structure of the federal reserve's balance sheet. as part of prudent planning, we've been reviewing these principles in recent meetings. we expect those discussions to continue and intend to provide further information at an appropriate time. for today i will note that in the view of most participants

the broad principles set out in june 2011 remain applicable. one difference is worth mentioning. while participants continue to think that in the long run the federal reserve's portfolio should consist predominantly of treasury securities, a strong majority now expects that the committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, though in the longer run the sales could be used to eliminate residual mbs holdings. given the outlook and the committee's policy guidance these are unlikely to be actual policy for quite a while. let me turn now to current policy issues. with unemployment still elevated an inflation below the committee's longer run objective, the committee is continuing its highly accommodative policies.

the federal funds rate at its rate cannot meaningfully be reduced lower. thousand we're providing policy accommodations through two methods. but communicating to the public the committee's plans for setting the fed fund rates targeted over the medium term and by second holding and purchasing agency securities and embacked securities. let me discuss each. first the committee reaffirmed its expectation that the current exceptionally low range for the funds rate will be appropriate at least as long as the unemployment rate remains above 6.5% so long as inflation and inflation expectations remain well behaved in the census described in the fomt statement. the phrase at least as long in the committee's interest rate guidance is important. the economic conditions we have set out as proceeding any future rate increase are threshold, not

triggers. for example, assuming that inflation is near our objective at that time as expected, a decline in the unemployment rate to 6.5% would not lead automatically to an increase in the federal funds rate target but rather would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase. the more subdued the outlook for inflation -- cls one expected the first increase to occur in 2010. moreover, as hong as the economy remains short of maximum employment, inflation remains our longer run objection and they remain well anchored, increases in the target for the federal funds rate once they begin are likely to be gradual, consistent with the committee's balanceled approach to meeting its employment and price

stability objectives. the purpose of this forward guidance is for households and businesses that monetary policy or pags the second policy tool being employed by the committee is asset purchases, given that the committee has been purchased 40 billion per month in agency-backed securities and 45 billion per month in treasury securities. when our program of asset purchases was initiated last september, the committee stated the goal of promoting a substantial improve in the outlook for the labor market in the context of price stability and noted it would also be taking appropriate account of the efficacy and kovt of the

program: today the committee made the no-no changes to the purchase program. although the committee left the pace of purchases unchanged at today's meeting it's stated that it may vary the pace of purchases as economic conditions evolve. any such change will reflect the incoming data and their implications for the outlook as well as the cumulative progress made towards the committee's objectives since the program began in september. going forward the economic outcomes that the committee sees at most likely involved continuing gains in labor markets supported by moth moderate growth that picks up over the next several quarters as the near term restraint from fiscal policy and other head winds diminishes. we'll also see inflation moving back towards our 2% objective over time. if the incoming data are broadly consistent with this forecast, the committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and that the subsequent data remain broadly

aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year ending purchases around mid-year. in this scenario when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7% with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program. i would like to emphasize once more the point that our policy is no way pre-determined and will depend on the evolution of the outlook as well as the cumulative progress towards our objectives. if conditions improve faster sajanthan balasingam expected the pace of asset purchases could be reduced somewhat more quickly. if the outlook becomes less favorable, on the other hand, or financial conditions are judged to be inconsistent with further progress in the labor markets, we duckses in the pace of purchases could be delayed. indeed, should it be needed, the

committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time to promote a return to maximum employment in a context of price stability. it's also worth noting gsz here that even if a modest pace of reduction occurs, we'll only be slowing the pace at which we're adding to the portfolio. while continuing to reinvest principal payments and proceeds from maturing holdings as well. these large and growing holdings will continue to put downward pressure on longer-term interest rates. to use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes. i will close by drawing again the important distinction between the committee's distinction about adjusting the pace of asset purchases and its forward guidance regarding the target for the federal funds rate. as i mentioned, the current level of the federal funds rate

target is likely to remain appropriate for a considerable period after asset purchases are concluded. to return to the driving analogy, if the incoming data supports the view the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases. however, any need to consider applying the brakes by raising short-term rates is still far in the future. in any case, no matter how conditions may evolve the federal reserve remains committed to fostering substantial improvement in the outlook for the labor market in a context of price stability. thank you. i'll be glad to take your questions. >> mr. chair, steve liesman with cnbc. hate to have a question to clarify. when you say gradually reduce purchases beginning later this year and ending it next year when the unemployment rate is 7%, what is that? is that a decision by the fomc?

is that -- is that a -- >> that is -- we had a good discussion of that issue today, and we haven't had -- obviously there's no change in policy involved here. there's simply a clarification helping people to think about where policy will evolve, so it was thought it might be best for me to explain it to this group and answer questions. future policy statements may include elements of this, but it's not a policy change. i'm just trying to explain how our -- how we're making a substantial improvement in the outlook of the labor market, how we're making that concrete and how we're thinking about the potential future of the program given alternative policy and economic developments. >> so there was no consensus on that? that's not a vote of the fomc, not a plan written down some place? >> it represents the consensus of the fomc, yes. >> if you could just -- the question i was going to ask is

could you give us some information on substantial improvement. is that the unemployment rate coming down by itself to 7%, or are there other factors involved, and is it substantial compared to the fall? >> well, there are many factors that we look at in trying to judge the labor market. as you know, we look at participation, payrolls, a variety of other data, but the 7% unemployment rate is indicative of the kind of progress we'd like to make in order to be able to say that we've reached substantial progress. >> john hillson from the "wall street journal." mr. chair, there's an undercurrent of optimism in your forecast and your statement and the policy statement today, for instance, the unemployment rate forecast comes down to 6.5 to 6.8% next year. if the case is that the fed has overestimated the economy's

growth rate very often and the past during this recovery, so we've gone through a period in the first half of the year with pretty subdued growth, so i would like to hear you explain where this optimism comes from and how confident you are that these expectations are going to be met. >> the fundamentals look a little better to us. in particular, the housing sector which has been a drag on growth since the crisis is now obviously a support to growth. if not only creating construction jobs, but as house prices rise, increased household wealth, supports consumption spending and consumer spending. state and local governments who have been a major drag are now coming to a position where they no longer have to lay off large numbers of workers. generally speaking financial conditions are improving. the main drag or the main headwind to growth this year is, as you know, is the federal

fiscal policy which the cbo estimates is something on the order of 1.5 percentage points of growth, and our judgment is, that you know, given that very heavy headwind, the fact that the economy is still moving ahead at least at a moderate pace is indicative that the underlying factors are -- are improving, and so we'll see how that evolves. obviously we haven't seen the full effect yet of the fiscal policy changes. we want to see how they evolve as we get through that fiscal impact, but we're hopeful, as you can see from the individual projections, and, again, these are individual projections, not in an official forecast of the committee, will be obviously very interested to see if the economy does pick up a bit and continue to reduce unemployment as we anticipate. i think one thing that's very important for me to say is that -- if you draw the conclusion that i just said that our policies -- that our purchases will end in the middle of next year, you've drawn the

last conclusion because our purchases are tied to what happened to the economy, and if the federal reserve makes the same error and we overestimate what's happening, then our policies will adjust to that. we're not -- we have no deterministic or fixed plan. rather, our policies are going to depend on this scenario coming true. if it doesn't come true, we'll adjust our policies to that. >> and i'll go to al and then robin. >> thank you, mr. chair. financial conditions have tightened in the last few weeks and bond yields have gone up and have gone up again today. why do you think that is, and could you talk a little bit about whether that rise in bond yields, long-term interest rates, could affect your economic outlook and particularly given that mortgage rates are now back up above 4%, if that could affect the recovery under way in the housing market. >> that's a good question. yes, rates have come up some. that's in part due to more optimism, i think, about the

economy. it's in part due to perceptions of the federal reserve. the forecast, the projections that aour participants submitte for this meeting were done the last few days so they were done with full knowledge of what happened to financial conditions. rates have tightened some, but, you know, other factors have been more positive in piecing house prices, for example. i think as far as the housing market is concerned, we're going to want to watch that, but one important difference now is that people are move on the mistdic about housing. they expect house prices to continue to rise, and we see that, for example, in the survey question in the michigan survey and that, you know, compensates to some extent for a slightly higher mortgage rate, and in fact, in terms of a monthly payment on a house, the change in mortgage rates we've seen so far is not all that dramatic. so, yes, our forecasts, our projections do factor that in,

and -- and if interest rates go up for the right reason, that is, both optimism about the economy and an accurate assessment of monetary policy, that's -- that's a good thing. that's not a bad thing. >> robin. >> robin harding from "the financial times." mr. chairman, you've argued it's the effect that the fed holds which affects long-term interest rates. how do you reconcile that with a very sharp rise in real interest rates that we've seen in recent weeks, and do you think the market is correctly interpreting what you think is most likely to be the future path of the federal reserve's stock of assets? thank you. >> well, we were a little puzzled by that. it was bigger than can be explained i think by changes in the ultimate stock of asset purchases within reasonable

ranges, so i think we have to conclude that there are other factors at work as well, including, again, some optimism about the economy, maybe some uncertainty arising, so i'm agreeing with you that -- that it seems larger than can be explained by a changing view of monetary policy. it's difficult to judge whether the markets are in sync or not. generally speaking though i think that what i've seen from analysts and market participants is not wildly different from what, you know, the committee is thinking. as i try today to communicate, i think the most important thing that i want to convey again is that it's important not to say this date, that date, this time. it's important to understand that our policies are economic dependant and in particular if financial conditions move in a way that make this economic scenario unlikely, for example,

then that would be a reason for us to adjust our policy. >> that you had stayed in your position as chairman for longer than you wanted to, and maybe longer than you were supposed to. do you agree with that assessment of your term? and can you update us on any conversations you've had with him about your future? >> well, ilan, we spent two days working on monetary policy issues, and i would like to keep the discussions here on policy. i don't have anything for you on my personal plans. >> craig? >> greetings, mr. chairman, craig torres from "bloomberg." i'd like to push for a little deeper explanation on thresholds and triggers. >> sure. >> the forecast and the mysterious dots kind of don't map into the unemployment forecast.

we see more gradual rate rise going out into time, people moving to the right -- at least one person -- on when they expect the rate to increase. and yet, unemployment's going to fall to 6.5% in 2014. also note that labor force participation is not in great shape, and you, in fact, have been a big believer that a lot of the exit from the workforce is related to weak demand, not structural factors. so here's my question. can you explain a little bit more -- you know, how -- maybe is the threshold too high? and i'll point out that the vice-chair and two other people used to work here have done significant research on -- maybe you need to let the unemployment rate fall much lower to pull these people back into the labor force. i'm wondering if you can expand on that. >> well, it's a great question. but what you pointed out, the difference between the little dots and the forecast actually

illustrates the point, which is, remember, the 6.5% is a threshold, not a trigger. in other words, when we get to that point, we will then at that point begin to, you know, look at whether an increase in rates is appropriate. and among the things we would take into account, first of all, is inflation. and inflation, obviously, is very low and expected to stay low. secondly, we would be taking into account, does that unemployment rate fairly represent in some sense the state of the labor market? and as you pointed out, we have underemployment, part-time work, people leaving the labor force, reduced participation, long-term unemployment, a number of factors which suggests maybe the 6.5% is a little bit -- not exactly representative of the state of the labor market at that point. so first of all, since it is a threshold and not a trigger, we're entirely free to take all of that into account before we -- before we begin the process of raising rates. and that's what the diagram

suggests. people are saying that unemployment will be at 6.5% in late 2014 or early 2015, but they're saying that increase in rates may not follow, but several quarters after that. in terms of adjusting the threshold, i think that's something that might happen. if it did happen, it would be to lower it, aim sure, not to raise it. >> from "the new york times." following up on that, i understand 6.5 is a threshold, but you have talked about a 7% line for asset purchase, sounded less like a threshold than a target. you said if you're at about that level, you will stop with asset purchases mid next year. you talked about seeing substantial improvement in the labor market. it's easy to see a situation where we get to 7% without seeing labor force participation increase, unemployment rate at the same level for three years now. has something changed in your thinking about the value of

asset purchases? why are you cutting them off before you see that substantial improvement? >> well, substantial is in the eye of the beholder. i think going from 8.1% and a stagnant rate of improvement to 7% under stronger economic growth is a substantial increase. it's important to explain that we view ourselves as having two tools. one of them is rate policy. that includes both setting the rate and providing guidance about future rates. that's our basic tool. that's the one the federal reserve and other central banks have used forever. asset purchases are a different kind of thing. they're unconventional policy. they come with certain risks and certain uncertainties that are not necessarily associated with rate policy. so our intent from the beginning is, i've been very clear, was to use asset purchases as a way of achieving some near-term momentum, to get the economy moving forward into a sustainable recovery. and then, essentially, to allow the low interest rate policy, which -- to carry us through.

so what i -- let me just make two, i think, very important points. the first is, our target is not 7, it's not 6.5. our target is maximum employment, which, according to our projections, most people on the committee thinks is between 5, 6%. the guideposts, that tells how we'll shift the mixing of our tools as we try to land the ship on a -- you know, on -- in a smooth way onto the aircraft carrier. sorry. so the other thing i wanted to say was that stopping asset purchases, when that happens -- and i think we're still some distance from that happening -- but when that happens, that won't involve ending the stimulus from asset purchases, because we're going to hold onto that portfolio. and if the stock theory of the portfolio is correct, which we

believe it is, holding all of the securities off of the market and reinvesting and still keeping the -- you know, rolling over, maturing securities, will continue to put downward pressure on interest rates. and so, between our commitments to low federal funds rate, the large portfolio, we will still be producing a very large amount of stimulus, in our view, enough to bring the economy smoothly towards full employment without incurring unnecessary costs or risks. >> hi, chairman. you in your statement before the press conference and in the policy statement acknowledged that inflation readings have been low. but you maintain that inflation -- longer-term inflation expicturations have maintained -- expectations but bond markets have fallen in recent weeks.

is that of any concern? if not, why? what would you need to see to -- for the committee to start being more concerned that longer-term inflation expectations are, in fact, falling? >> well, this is something we watch very carefully. there are a number of -- as i mentioned in the statement, there are a number of transitory factors that may be contributing to the very low inflation rate. the fact that sequester and medical payments. these are some things we expect to reverse and we expect to see inflation come up a bit. but first, on inflation expectations, it is true that the break-evens from the inflation adjusted -- inflation index bonds have come down. to this point, they still remain within the historical range that we've seen over the past few years, and moreover, other measures of inflation expectations -- be it forecasts by professional forecasters, whether it's survey measures

from firms or households -- those are all still pretty much in the same place as they were. now, that being said -- and as i said in my opening remarks -- we don't take anything for granted. and one of the preconditions for the policy path that i described is that inflation begin at least gradually to return towards -- towards our 2% objective. if that doesn't happen, we will obviously have to take some measures to address that. and we are certainly determined to keep inflation not only -- we want to keep inflation near its objective, not only avoiding inflation that's too high, but we also want to avoid inflation that's too low. >> mr. chairman, peter koch with bloomberg television. since your comes on may 22nd, the lengths to which you were

stressing the forward guidance here today, it does suggest that there are some out there worried, not getting your message right now. i'm wondering to what extent do you think now that your exit strategy is going to be that much more challenging, because even in this small period of time when you haven't done all that much, you've seen this kind of reaction. >> well, it is important for us to communicate. it's particularly important when we have an unusual economic situation where i think the standard relationships are not applying the way they have, where we're using unconventional tools, we're using forward guidance. so i guess i agree with you that our communication is going to be very important. we hope that the -- again, the key point i've tried to make today is that our policies are tied to how the outlook evolves, and that should provide some comfort to markets, because they will understand, i hope, that we

will be providing whatever support is necessary. if the economy does not improve along the lines that we expect, we'll provide additional support. if financial conditions evolve in a way that's inconsistent with economic recovery, we will provide support. but we're -- and in that way, we hope to increase confidence both among market participants, but also among investors and private consumers and other people in the economy. but again, your point is well taken that we are in a position where the simple adjustment by 25 basis points in the federal funds rate seems like a long-ago experience. and we are in a more complex type of situation. but we are determined to be as clear as we can, and we hope that you and your listeners and the markets will all be able to follow what we're saying. >> we'll go to donna and then go to peter. >>