Page 2 of
2 Bernanke: Don't take me for
granted, boys By Julian
Delasantellis
costs money, costs
that rise along with the projected near-term
volatility of the markets. Greenspan believed that
the corporate funds utilized to guard - "hedge" -
against excess volatility could be better spent on
more productive capital investments like plant and
equipment.
But as this operational
paradigm became a finely honed tradition, an
inherent contradiction in the process emerged.
If the markets know, and factor into
securities prices, what the
results of a Fed meeting will
be prior to the actual meeting, does that mean, in
effect, that when the full Federal Reserve Open
Markets Committee members gather on meeting day,
they will feel that their hands are tied, that
they can't act in such a way other than the market
expects, for fear of provoking a severe selloff?
Is the tail wagging the dog here? More
importantly, in this case, who's the dog and who's
the tail?
The Greenspan Fed felt that this
was a cost worth incurring, in order to avoid the
greater costs of unpredictability. Thus, an entire
industry of Fed watchers developed, like Cold War
Kremlinologists, in order to read the monetary
policy tea leaves, to ascertain the direction and
quantity of upcoming Federal Reserve moves so as
to profitably position trades in advance of the
actual announced decisions.
The Chicago
Board of Trade futures exchange actually initiated
a commodities futures contract, Federal Funds
futures, so that commercial hedgers and punters
alike could seek to profit from how the Fed would
act.
The Greenspan Fed, and in its early
months the Bernanke Fed, never disappointed the
markets. Thus, if it is seen that the Fed always
follows the markets' lead, then, in essence, it is
as if the markets are controlling the Fed, not the
other way around. (I wrote about this perception
in my September 18 ATol piece, A rate cut with a shoeshine and a
smile.)
Bernanke apparently
wants to change how the cards in this game are
dealt. He surprised the markets with his
double-barreled rate cut on September 18, and he
found a way to surprise the markets on Wednesday.
The markets did get the dual twenty five
basis point rate cuts they had expected, but it
was in the post-meeting statement, the booming
voice of the monetary gods thundering down from
the Olympian heights of their headquarters in
Marriner Eccles Hall in Washington, where it can
be seen that Bernanke might be trying to make
himself a little bit of a mystery to the boys in
the markets.
The September post-meeting
statement gave the markets every indication, every
reason to believe, that there would also be seen a
cut at the October meeting, the cut we actually
did see on Wednesday.
"Developments in
financial markets since the Committee's last
regular meeting have increased the uncertainty
surrounding the economic outlook. The Committee
will continue to assess the effects of these and
other developments on economic prospects and will
act as needed to foster price stability and
sustainable economic growth," the Fed said in
September.
But after Wednesday's meeting,
it seems that Bernanke batted his eyes,
flirtatiously telling the boys that in the future,
maybe yes, maybe no.
"Readings on core
inflation have improved modestly this year, but
recent increases in energy and commodity prices,
among other factors, may put renewed upward
pressure on inflation. In this context, the
Committee judges that some inflation risks remain,
and it will continue to monitor inflation
developments carefully. The Committee judges that,
after this action, the upside risks to inflation
roughly balance the downside risks to growth."
At first, the markets were puzzled by this
coquettish new Fed. The Dow Jones Industrial
Average was up over 100 points before the
announcement, it quickly dropped to be down 20
points after the market got a chance to read the
statement, rallied back to close up 134; for now,
at least, the market agrees with Hamlet's mother
that "The lady doth protest too much."
This leaves the markets, and the economy,
in an entirely new place. The worldwide Fed
analysis community is certainly not going to pack
up and go away. If the Fed is now placing an equal
or greater value on unpredictability over
transparency, in order to retrieve the policy
initiative it feels it imprudently ceded to the
markets, will it then take this thinking to its
logical conclusion and someday fail to act in such
a way that the economy needs, just so that it can
surprise the markets?
It is entirely
possible, and widely expected in the markets, that
the current subprime mortgage mess will spread and
intensify, festering across at least the entire
housing and financial sectors. If pride holds
Bernanke's hand from cutting rates and providing
liquidity when he should, just because the markets
called it first, the markets will look on this
situation very negatively. A lot of wealth could
be destroyed in the markets very, very quickly.
It's not as if pride has never ruled over
policy in Washington. Veteran journalist Bill
Moyers tells a story that, when he was working as
president Lyndon Johnson's press secretary in the
1960s, word came down that LBJ was planning to
fire cantankerous, obstreperous FBI Director J
Edgar Hoover.
As he thought Johnson
wanted, Moyers spread the word to the press; when
the story came out before Johnson got a chance to
make the official announcement, out of pique, he
reversed his decision and reappointed Hoover to
another term, where he stayed until his death in
1972.
Maybe we in the markets are taking
Bernanke for granted. We should not be treating
him like a cheap pickup in a singles bar. We
should call him the next day. We should send
flowers. Maybe we need take the entire Fed board
out to breakfast the day after.
Dr
Bernanke, did you just want to be held?
Julian Delasantellis is a
management consultant, private investor and
educator in international business in the US state
of Washington. He can be reached at
juliandelasantellis@yahoo.com.
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