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BookmarkSometimes it seems we might all be better off if current Federal Reserve Chairman Ben Bernanke were more like former Fed Chief Alan Greenspan.
Recall that traders and investors were often left scratching their heads after listening to what Greenspan had to say and, as some suspected back then, the disgraced former Fed Chief really didn’t know himself what he was trying to communicate much of the time. Markets were left to figure things out on their own and they did a pretty decent job of it, that is, up until the central bank inflated one too many asset bubbles about a decade ago.
Ben Bernanke, on the other hand, has taken great pains to improve the Fed’s communication strategy. It seemed to be working right up until May when the subject of “tapering” their $85 billion per month money printing effort became central to the discussion.
Since then it’s been an unmitigated disaster in many areas, the notable exception being U.S. stocks, as markets have been roiled by hawkish talk followed by dovish comments. The latest example of this came yesterday when Bernanke unwittingly boosted the price of most assets, notably gold that has now seen its sharpest move higher in two months, though the Fed Chairman didn’t really say anything new.
Financial markets and the financial media appear to be confused by the Bernanke Fed’s new communication strategy that, in some ways, is worse than the Greenspan Fed’s deliberate obfuscation.
A good example of this appears in this Bloomberg article that begins:
Gold futures rallied to a two-week high after Federal Reserve Chairman Ben S. Bernanke said yesterday that the U.S. needs “highly accommodative monetary policy for the foreseeable future.”
…
“Gold got a boost after Bernanke gave the impression that tapering is currently a distant dream,” Carlos Perez-Santalla, a New York-based broker at Marex North America LLC, said in a telephone interview
But, that’s not what Bernanke said and this only sets the stage for more market volatility in the days or weeks ahead. One need look no further than to this Greg Ip interview at CNBC to realize that there really wasn’t anything new from the Fed yesterday.
Recall that, while toiling at the Wall Street Journal, Ip was “the Fed’s mouthpiece” for a few years before leaving for a new post at The Economist and being supplanted by Jon Hilsenrath at the WSJ. So, Ip knows what he’s talking about and there’s nothing new about “highly accommodative monetary policy” as this refers to interest rates, not the Fed’s bond buying program.
Granted, after long-term interest rates have surged in recent months due to the initial “tapering” talk, Bernanke has a clear motive to lower expectations for lower levels of money printing and markets were eager to interpret the Fed Chief’s remarks yesterday as such.
Just as the spring tapering talk was, perhaps, aimed at cooling overheated equity markets, yesterday’s characterization of the Fed’s outlook may have been aimed at bolstering those same markets and halting tumbling bond prices.
To that extent it worked, but it sets the stage for more confusion and market turmoil in the period ahead if, for example, talk of “tapering” begins anew next week.
Bernanke’s comments have been a boon for gold and silver that have seen some of their heaviest buying in months, but, this could reverse very quickly the next time that Bernanke speaks.
Though markets think otherwise, nothing has really changed at the Fed and U.S. traders and investors still hate gold as evidenced by another acceleration of outflows from the SPDR Gold Shares ETF (GLD) earlier this week.
I don’t think Bernanke’s comments yesterday are going to change how U.S. money managers feel about the yellow metal and, in the end, they could simply be providing another reason for traders to cover existing short positions before initiating new ones at slightly higher prices.
Bernanke has just six months left to go at the Fed and he seems to be getting careless.
Clearly, no one cares about that today because the price of just about every asset is moving higher, but they might care about it next week.
