The economic recovery in real estate was making slow but steady progress. Ben Bernanke then discussed tapering of QE, which includes bond purchases (reducing them, reducing purchases).
Fed bond purchases had been supporting low mortgage rates. Low rates in turn had been supporting construction: labor, materials, equipment and all the associated goods and services rippling through the economy.
The talk of tapering caused many to fear a sudden drop in bond values, which happened as a self-fulfilling prophecy. Mortgage rates immediately started climbing.
The Fed panicked a bit. Its members started clarifying and reiterating about tapering. They did their utmost to make clear that such tapering was fully contingent upon the Fed meeting its employment and inflationary targets.
That helped to slow the mortgage rise, but higher employment numbers for June have worked in the opposite direction.
However, it must be understood that those job gains were almost entirely, if not entirely, built upon an economy before Ben’s taper-talk.
The dust has yet to settle. It is premature to judge bonds dead.
We expect the Fed will learn to gage its forward guidance concerning tapering. It will look back on this and statistically examine the talk’s impact.