The Bernanke Effect
It’s unlikely, at a Ben Bernanke press conference, you’ll see women partially disrobe and toss underwear at his desk under the high hopes of landing them on Bernanke’s balding head.
But, soft-spoken Ben has real power. Bernanke speaks; the Earth trembles.
The Dow plummeted -206 points at closing. Treasury security yields jumped to +2.33%. Mortgage interest rates rose to over +4%. Your 401(k) took a 1% hit.
Why did Stocks Plummet?
Heroin addicts never get enough. Wall street has been living on a $85 billion/month Fed high for so long that the thought of withdrawal pains is more than they can take.
You could watch the ticker fall like a brick as Bernanke uttered these horrifying words:
“The Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.“
“We would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.
– Ben Bernanke, FOMC Press Conference, 6/18/2013″
Everyone knows that asset purchases must eventually end. They knew it was coming, but the estimated timetable was shorter than expected.
The Dual Mandate
Always, without exception, the Fed follows these two bright lighthouse beacons:
- Price stability
- Maximum employment
Understand that and all Fed policy actions become clearer.
The FOMC Statement
The Fed changed nothing yesterday. Not a thing. Everything today is the same as it was yesterday. Life goes on.
What Bernanke and the FOMC Committee did do is provide reasoned future expectations.
Those expectations are based on their own internal forecasts of unemployment rate, inflation and the growth in real GDP between now and the end of 2015. Fed expectations are:
- Real GDP growth 2.3%-2.6% in 2013
- Real GDP rising to 2.9%-3.6% by the end of 2015
- Unemployment down to 7.3% by the end of 2013
- Unemployment down to 5.8%-6.2% by the end of 2015
- Inflation 0.8%-1.2% in 2013
- Inflation rising to 1.6%-2.0% in 2015
Under those conditions, the Fed believes that ending asset purchases by the middle of next year is the appropriate course of action.
You can tell Ben Bernanke is not a politician:
- He is open and honest
- He answers all question forthright
- He speaks clearly and concisely
- He hides nothing
- He always stays on task
- He doesn’t mince words
When was the last time a politician talked like that?
The Fed did not make any changes yesterday. None. Ladies, hold on to your undies!
The markets reacted wildly to what the Fed might do later this year or next. Changing economic conditions could totally reverse Fed actions.
In the coming days everything will settle back to normal and Wall Street will move on to stress over the slow down in the Chinese economy. What was said yesterday is already forgotten.
And the cycle begins anew… the next FOMC meeting is just 6 weeks away!