After four months of huffing and puffing about the possibility of scaling back asset purchases (money-printing) by just a little bit, Ben Bernanke, the Chairman of the Federal Reserve Board decided to do nothing. In fact, when looking at the Fed’s communication policy, it was worse than nothing.
The Fed has grown in terms of influence over the last few decades as its mandates and oversight have expanded dramatically. The Fed has also been seduced into to thinking that it can steer the economy (which is not the job of central bankers, by the way) and has responded by implementing multi-trillion dollar monetary experiments.
The Fed is so massive now that it was rather stunning that Bernanke failed to grasp the crucial need to get the communications policy right. Back in May, he was a bit surprised that investors were bidding up prices in the investment markets as though the Fed would never end its policy of Quantitative Easing (or QE3, as the current iteration is called) and he appeared during a Congressional testimony to say that this wasn’t the appropriate assumption and that investors should expect the Fed to “Taper” is rate of QE3 as early as September.
Now, Bernanke might have been patting himself on the back at that point thinking that he was upholding his general promise of being more transparent than his predecessors. After all, transparency is certainly a virtue when it comes to communications.
However, regardless of transparency, the message needs to be consistent over time and acted upon if trust is to be maintained. Bernanke essentially laid down a line (similar to another politician recently). However, as the summer drew to a close, Bernanke clearly became concerned about this line when contrasted against the fact that employment was not improving as fast as he had forecast. This lead to yesterday’s “Do Nothing” announcement.
However, “doing nothing” crashes right into the narrative that he has established back in May. Going forward, every time he talks, the markets will now be more confused. Is he serious? Is he not serious? Which metrics are really important to him? Are his comments politically influenced?
Sometimes “doing nothing” is doing a lot. But sometimes it can create a worse situation when one suggested that something was going to happen.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.