Friday, 9 October 2009

Will Bernanke steal the punch bowl any time soon?

Remarks by US Federal Reserve Chairman Ben Bernanke regarding the return to more normal monetary policy are quoted widely today. Apparently, quite a number of pundits interpret his remarks as yet another indication that Federal Reserve will begin to tighten monetary policy "soon". Bernanke was thus taken as a character witness for the many strategists who believes that NOW is the time to sell stocks.

I profess to have great respect for seasoned "Fed Watchers", who have deep knowledge of monetary policy and of the political games around the Federal Reserve. Their insights are invaluable when it comes to understanding the current policy situation. Unfortunately, these market professionals had taken a day off yesterday and left the scene to rather more lightweight commentators.

In fact, Bernanke said the following: "My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road". This could have been taken right out of any of his speeches of the past two months or so. There is nothing new in his statement, and no reason to spill tons of ink because of it.

Bernanke marked right from his inauguration a change from his often Delphic predecessor Alan Greenspan. Whereas Greenspan according to his memoir took pride in making statements so convoluted that US lawmakers did not know what he really meant, Bernanke believes in straight talking. With the exception of the onset of the financial crisis where then-secretary of the treasury Hank Paulson did all the talking, Bernanke has indeed mostly been clear in his statements.

Even if Bernanke is a straight talker, he is, however, also a part of the political game. It makes it so much easier to interpret his statements. There is a simple rule that one can apply. It goes something like: If you take a given statement and wonder what it means, try and negate it. If what comes out is meaningless nonsense, then the original statement is simply idle talk. Let us try this on the quote above. The last phrase would then turn into

At some point, however, as economic recovery takes hold, we will NOT need to tighten monetary policy to prevent the emergence of an inflation problem down the road.

Now that would be something. A central bank director stating that he will do nothing to fight inflation? He would be without a job faster than you can say "Federal Open Market Committee".

Try and use this simple principle in other situations. It is a very strong tool to identify idle talk, statements made simply because they have to be made, no matter how obvious they are. It will free up time and energy to focus on what is really important, namely to identify the many elements that together will mark the real turn of the monetary policy. Do not worry too much about Bernanke's various statements. When he wants to make himself heard because he has something to tell the markets, he will do so.

And by the way, no, the punch bowl will not be moved right now. US monetary policy will remain accommodating at least through this quarter and quite possibly through 2010Q1 as well.

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