When Ben Bernanke became chairman of the Federal Reserve in 2006 he promised a significant change. The Fed would be much more ‘transparent’ in letting markets and the public know more about its inner workings, its concerns, its internal debates, its potential decisions. He has certainly kept his promise.
But sometimes I yearn for the days of former Fed chairmen Paul Volcker and Alan Greenspan, who revealed nothing of what the Fed was thinking. Greenspan was particularly adept at befuddling even Congressional committees with his famous “fed-speak” language that left committee members and analysts asking afterwards, “Wha’d he say?”
That approach of providing no transparency helped get the economy through a lot of problems during their combined decades in office. We only found out long afterward how worried the Fed had been at various times, knowledge that no doubt would have resulted in several panics had the Fed been transparent with its concerns at the time.
How well has it worked out having the Fed providing more transparency since 2006?
In February, 2008 in the early stage of the 2008-2009 recession, we saw Fed Chairman Bernanke and then Treasury Secretary Paulson in televised Congressional hearings on the economy and financial markets. You would think all participants would want to boost the chances of their new rescue efforts working, by providing the public with as much positive bias as possible.
But no, in the interest of full transparency, we had Bernanke warning about how the Fed expected still more negative pressure ahead from the housing collapse, worsening labor markets, a credit crunch that may have still more shoes to drop, and revealing that the Fed was also beginning to worry about the potential for rising inflation.
That was really brilliant. Spend big bucks on stimulus plans aimed at boosting public confidence that more serious problems could be averted, and then completely undermine the effort with transparency that revealed still more worries in the Fed’s thinking.
Since then the transparency has increased. The Fed’s statements after its FOMC meetings have become more revealing, the actual minutes of the meetings are now released within a few weeks, and this year Chairman Bernanke has begun holding a press conference following the meetings to provide any lingering information or questions not provided in the FOMC statement.
The result has been that over the last three years markets have been forced to focus not so much on the normal driving forces of markets, the economy and earnings, but on what the Fed is worried about, what its members are thinking, what tools it is discussing that it could bring into play if needed, and what might trigger potential market-moving action.
And Chairman Bernanke admitted in his press conference yesterday that the Fed is targeting the stock market as a large part of its effort to improve the employment picture. He seemed to agree that QE1 and QE2 did not result in the additional liquidity going directly into jobs and the economy, and QE3 may not either, but that it will hopefully lower long-term interest rates, including mortgage rates, and possibly increase asset prices. And he said, “To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. So house prices are one vehicle. . . . And stock prices – many people own stocks directly or indirectly. The issue is whether improving asset prices will make people more willing to spend.”
One has to wonder.
If using interest rate cuts, and then QE1, QE2, and ‘operation twist’ to bring 30-year mortgage rates down to generational lows of 3.6% has not jump-started the housing market to any great extent, would 3.2% make any meaningful difference? Mortgage rates do not seem to be the problem for would-be home buyers. Tightened lending practices, lack of jobs, and uncertainty about the future are the problems.
Will the dramatic action have its apparent other desired result, another leg up for the stock market. Or will it result in a sell-off, given that expectation of the Fed action has pretty much been factored in since the market’s June low?
For investors, it was bad enough that the action alone indicated the Fed believes the economy and threat of a global recession have become so alarming that it could wait no longer and had to fire off such a huge barrage of measures all at once, virtually emptying its arsenal of meaningful weapons.
So the further uncertainties Chairman Bernanke felt compelled to provide in his press conference were not needed, and may have done more harm than good to the Fed’s intentions.
Bernanke certainly did not take European Central Bank President Draghi’s positive and encouraging approach. In promising ECB action Draghi said “The ECB will do whatever it takes to save the euro - and believe me it will be enough.”
But in his press conference, while saying the Fed’s target is unemployment, Chairman Bernanke kept repeating that the Fed’s monetary action “is not a panacea”, that it will not solve the unemployment or slowing economy problems, that it can only “provide some support”, that further help would have to come from the fiscal side (Congress). He also said several times in response to questions that “The Fed does not have tools that are strong enough to solve the unemployment problem.”
The Fed’s action would have a better chance of producing the sustained positive market reaction the Fed apparently is after, if the Fed had simply taken the action and shut-up. Chairman Bernanke’s penchant for ‘transparency’ has caused more uncertainties than clarity over the years since adopted.
And it did so again this time to a degree that a positive market reaction is far from assured.
Meanwhile, I’m still liking our buy signal on gold and 20% holding in GLD, and sell signal on U.S. Treasury bonds, and 20% holding in the ProShares Short 20-year bond etf, symbol TBF.
