Markets were taken by surprise when the Fed announced they would continue their monthly bond purchases. We take a look at why Bernanke’s earlier statements may have caused some confusion and ask what it means for future policy decisions.
“As I’ve said, asset purchases are not on a preset course, they are conditional on the data. They’ve always been conditional on the data,”¹ said a somewhat perplexed Chairman Bernanke in response to the notion that his committee’s failure to announce a tapering of bond purchases in their September meeting may have caught the market and its prognosticators by surprise.
In his defense, Bernanke had just concluded remarks in which he offered a clear and thorough explanation that the two primary determinants of Fed policy (unemployment and inflation) remain well below the levels deemed acceptable. So why the confusion?
It may have been that comment back on May 22nd – the mere suggestion while testifying before Congress that if he and his fellow committee members “see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings… take a step down in our pace of purchases.”² Yes, that was one that changed the market’s expectation, caused interest rates to jump and simultaneously brought a multi-decade bond market rally to a screeching halt.
Because markets hang on Bernanke’s every word, it’s fair to dissect such a pivotal phrase. Given that the Fed has proven itself to be an overly confident lot, investors fairly concentrated their attention on the apparent need to see “continued improvement” to trigger action within the “next few meetings.”
Granted, improvement is a generous word to describe such minimal gains in the labor market, but the Fed and White House continually cited a decrease in the unemployment rate as support for their policies. Neither has been forthcoming to investors or voters that the rate decline is primarily attributable to the inconvenient truth that Americans are simply leaving the workforce, a troubling trend we mentioned here eighteen months ago. Investors were therefore justified in expecting that Washington’s definition of “improvement” remained unchanged and reduced bond purchases were imminent.
But Bernanke’s transparency changed last week as well. So much in fact that this listener wondered aloud if this was an exercise in backpedaling or perhaps the voice of Bernanke’s most likely successor finding its way to the mic. Regardless, the more Bernanke spoke, the clearer it became. While etymologists may be uncertain as to the origin of a “country mile,” the unspecified distance appears to be a fair measurement for the ground that remains between economic reality and the metrics the Fed deems acceptable. Apparently it is that shortcoming that provides justification for the continual printing of money and subsequent purchasing of the Treasury’s debt.
Still, confusion remains. If the gap is so large, why suggest in May and again in June any potential for a miraculous recovery within the “next few meetings?” Why not abandon any talk of a taper and instead ramp up QE to further stimulate the sluggish economy?
Bernanke simply sidestepped questions along those lines, as he did to inquiries surrounding his expected retirement. Frankly Bernanke sounded exasperated at times; hardly unwilling to admit defeat but clearly frustrated with a lack of progress and seemingly anxious to pass the responsibility for this quagmire to someone else.
Bernanke’s self-created confusion would be of greater concern, but all indications suggest his 2014 calendar will be full of high-priced speaking engagements, not so-called public service. Investors now turn to his yet-to-be-named successor to determine the Fed’s next move: QE as far as the eye can see or an about-face, marked by a reduction of bond purchases only permissible by the adoption of one of two bipolar alternatives: a gross neglect of economic reality or, more ominously, an admission that such experimental purchases are inefficacious.
1 Federal Reserve, “Chairman Bernanke’s Press Conference” 18 Sept 2013 http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20130918.pdf
2 Reuters, “Bernanke’s Q&A testimony to congressional panel” Web 22 May 2013. http://www.reuters.com/article/2013/05/22/us-usa-fed-bernanke-highlights-idUSBRE94L0O720130522