Federal Reserve Chairman Bernanke can’t say anything right these days. The Fed’s attempt to communicate their QE3 exit strategy led to a market overreaction, which eventually normalized but not without sparking new fear in investors.

To provide context, the Federal Reserve has been purchasing $40 billion per month of agency mortgage-backed securities and $45 billion per month of U.S. Treasury securities. “Tapering” refers to a reduction in the pace of purchases and Bernanke hinted that it might begin later this year if job growth and inflation showed “substantial” progress toward their goals (6.5% unemployment with 2% inflation). They expect to reduce the pace of purchases through the first half of 2014 and end purchases around midyear with unemployment projected around 7% at that time. Note that they will continue to reinvest principal payments and proceeds from maturing holdings. They believe holding all of those securities off of the market will continue to put downward pressure on interest rates.

“And so, between our commitments to a low federal funds rate and 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.” (Chairman Bernanke’s Press Conference June 19, 2013). In a few years we’ll be able to weigh in on that statement but I’m just glad I’m not the author or messenger. The imminent issue is that prices for Treasuries and agency mortgage-backed securities have been inflated from QE3 and the potential for capital losses is real when the central bank stops purchasing them.

Bernanke also noted in the press conference that private payroll employment has been averaging about 200,000 jobs per month over the past six months and the unemployment rate was unchanged at 7.6% but underemployment (quality versus quantity of new jobs) has become a concern. The U6 rate, which includes part-time for economic reasons as well as marginally attached, discouraged, and the unemployed jumped from 13.8% to 14.3%. There is speculation that the Affordable Care Act’s six month “look back” rule has encouraged some employers to adjust the hours of their workforce so fewer employees qualify for full-time employee medical insurance requirement.

Data supports the argument that the ACA is a headwind to full employment. The industries adding workers in June are in categories where companies have been shifting from a FT to a PT employment model. Respondents to a survey by the International Foundation of Employee Benefit Plans showed that 20% of small employers (0-50 employees) and 15% of large employers (>50 employees) have or plan to adjust hours so fewer employees qualify for full-time employee medical insurance requirements. No big surprise then on July 2, 2013, the administration informally announced in a blog post on www.treasury.gov that it will delay for one year new mandatory reporting requirements for employers and health insurers-as well as related employer shared-responsibility penalties– under the Affordable Care Act.

Instead of pointing to the ACA, Bernanke blamed federal fiscal policy as the main headwind to growth, estimated by the CBO to approximate 1.5%. It is important to remember that some sequestration cuts are just beginning in the third quarter so we haven’t felt the full impact yet. Despite all this, GDP growth was 1.8% in the first quarter and an estimated 1.3% in the second quarter with forecasts of 2.4% for the year. The fact that the economy absorbed the end of the payroll tax holiday with a dysfunctional Congress and continued to grow is what I would call “substantial” progress.