Janet Yellen, the nominee for Chairman of the Federal Reserve Board, will likely try in some ways to convince markets that she is not the Super Dove which her previous comments and actions suggested that she is.
But, we have seen this play before. Prior to ascending to Fed Chairman in 2006, Ben Bernanke was already known has “Helicopter Ben” after a 2002 speech in which he said that the Fed could always fight deflation simply by dropping money from helicopters.
He appeared to be constrained during the first year and a half of his tenure as Chairman. Then, in the summer of 2007, the winds began to shift. A few months after HSBC admitted to having problems with subprime mortgages in its U.S. division, news came out that a couple of Bear Stearns funds which invested in subprime mortgages, collapsed. Despite a trickle of subprime naysayers at the time, the HSBC and Bear Stearns episodes were generally a surprise to the rest of the market.
As details of the Bear Stearns debacle emerged beginning in June and accelerating through July, Bernanke casually noted that the U.S. subprime mortgage situation was “contained.” He and U.S. Treasury Secretary Hank Paulson spoke together a number of times stating that the worst of the situation had passed. They downplayed the need for any bailout at all. And then, to reassure markets even more, Paulson said that he had a bailout “bazooka” ready to use if the situation did take a turn for the worse and began to impact the main government mortgage insurers, Fannie Mae and Freddie Mac.
Seven weeks later Paulson was firing his bailout “bazooka” and, in an effort to calm markets, Bernanke cranked open the liquidity spillways around the dam and never looked back. For the last six years of his tenure, it has been full on “Helicopter Ben”, artificially suppressing interest rates and printing trillions in money whenever it looked like the U.S. economy might have a hiccup. After the early brave talk, he reverted back to his old ways.
So, when Janet Yellen tries engaging in some early brave talk of her own and the markets give her the benefit of the doubt, remember her predecessor.
Although there is almost no chance that bond yields will fall back to the generational lows that we saw in July 2012, a dovish Yellen could mean that bonds will tread water for a while longer before the relatively young secular bear market in bonds resumes.
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