Federal Reserve chairman Ben Bernanke just had one of the most surprising press conferences of recent years, in which he indicated, in specific terms, the long-awaited end of the central bank's intervention in the markets.
Bernanke told Fed watchers to look out for higher interest rates when unemployment, currently at 7.9%, hits 6.5%. He also said he was willing to see higher rates of inflation hit the economy.
At least, we think that's what he said.
The experts are still translating Bernanke's trademark obscure financial patois.
Scott Minerd is the chief investment officer of Guggenheim Partners, where he oversees around $160bn. Like many other investors, he regularly mines Bernanke's statements for clues about what the Fed will do next – which is crucial when the Federal Reserve is such a big player in the markets. He found himself thrown off by the contradictions, broad hints and unexplained numbers in the Fed's statement.
"I think Dr Bernanke is very good at understanding that you don't need to answer a question," Minerd said. "All you need to do is respond."
And respond, Bernanke did – for an hour. At the end, CNBC host Rick Santelli quipped that no traders at the New York Stock Exchange had understood a word of what Bernanke said.
Investors – both big ones and regular people – should be keenly interested in when the Fed will stop its intervention in the markets. There is evidence that the Fed is distorting the real prices of bonds, which Bernanke gave a nod to today when he acknowledged "unintended consequences." Long periods of low interest rates could also be hurting parts of the economy. People who have savings are earning no interest, and even banks are finding it harder to make money with such low rates.
The Fed is currently trying to boost the economy in two ways: it is keeping interest rates very low, at zero, in the belief that it will encourage banks to lend and also, as a side effect, boost the stock market. The Fed is also pouring billions of dollars a month into the economy by buying up mortgage bonds and Treasury bonds.
The Fed believes that by buying mortgage and Treasury bonds, it can control the supply and push other investors to buy corporate bonds or deploy their money in other useful ways in the economy. The Fed is currently holding over $2tn of bonds, or more than double the amount it held only five years ago.
In today's statement, Bernanke seemed to be saying something remarkable: he suggested that the Fed would consider ending its policy of low interest rates once unemployment gets down to 6.5% and inflation rises.
That's the most specific detail the Fed has ever given about its plans to raise interest rates, which have been at historic lows for several years.
But why so specific? Why 6.5%? The Fed chairman said, after all, that he considers around 5% unemployment as "full employment." Six and a half percent is a far cry from that, and suggests that the Fed is getting impatient to raise interest rates again – but we can only surmise.
The new benchmark announced on Wednesday also contradicts when the Federal Reserve has said before. The central bank previously said it would start thinking about raising rates in 2015.
Now Fed watchers are confused about why the central bank changed its tune, and whether to look for the 6.5% unemployment number or the calendar date of 2015 for higher rates.
As a result, the specifics only had the quirky effect of leaving Fed experts dissatisfied.
Minerd disliked what he called the "ambiguity" in Bernanke's statements. "What happens if unemployment drops to 6.5% in 2014?" Minerd said. "Does that mean he's going to raise rates then?"
"If you can't explain to me how you're going to deal with it, you probably don't have a strategy," Minerd said of the Fed's approach to exiting the markets.
Paul Edelstein, director of financial economics for IHS Global insight, noted the contradiction between the Fed's desire for clarity and its actual words: "This approach to policy guidance was intended to increase understanding of the Fed's intentions and to improve market expectations of future policy. The initial concern, however, is that it could do the opposite."
Bernanke, who has devoted himself to bringing a new era of transparency to the Federal Reserve, is a far better communicator than previous Fed chairman Alan Greenspan, a weaver of riddles and creator of economic mazes who once quipped: "If you understood what I said, you obviously weren't listening."
But to say Bernanke is clearer than Greenspan is not to say much. Bernanke knows what he says has a strong effect on the stock market, usually, and so he speaks as obscurely as an 18th-century diplomat. Expecting him to be oblique, few observers press him to provide more detail.
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