"It is pretty obvious that the Fed was caught off guard by the market's reaction given the lengths to which they have gone to reshape market expectations," Drew Matus, deputy U.S. chief economist at UBS Securities LLC in Stamford, Connecticut, and a former analyst at the New York Fed, said in an e-mail. "The range of both speakers and outlets suggests that these comments are, if not coordinated, then at least part of a collective -- likely futile -- effort to re-mold the market's view of the June FOMC press conference." Bloomberg News
And, along with this we get the message from the White House: Bernanke is Gone. According to this report, Jack Lew, Obama's new Secretary of the Treasury, has prepared a "Shortlist" of names to take over for Fed Chairman Ben Bernanke in January 2014. The caveat is, of course, if Mr. Bernanke decides to leave his post.
This is not new, I wrote on this on June 18: "Obama Signals Bernanke Out; Bernanke to Signal Bond Purchases Over." Well, on June 19, Mr. Bernanke did give a signal that the "tapering" of bond purchases might begin sometime this year.
But, Mr. Obama and the Federal Reserve System did not get exactly what it wanted. Treasury bond prices fell and yields rose… fairly dramatically. And, we have seen something that we very rarely see -- central bankers losing their cool.
Never have so many officials at the Federal Reserve said so much about the intent of monetary policy in so many different venues. This response has been unprecedented!
But, Mr. Bernanke has struggled all along with communications. See "Ben Bernanke: Please Understand Me" from May 30, 2012 and "Bernanke Transparent About His Lack of Self-Confidence" from January 12, 2012.
During most of Bernanke's tenure at the Federal Reserve, Chairman Bernanke has believed that the press, the public, investors, the market has not understood what his monetary policy has been about. So we have the extended economic and interest rate forecasts of members of the Fed's Open Market Committee released to the whole world. We have special press conferences so that Mr. Bernanke can "explain" what the Federal Reserve is doing. We have had the chairman of the Federal Reserve give a series of lectures at a major university to explain what monetary policy is all about. And, we have had more speeches and press releases given by Fed Board members and the presidents of district Federal Reserve Banks than ever before.
Still, Mr. Bernanke and other officials in the Federal Reserve System can't seem to get the messages they want across to the rest of the world! What a mess!
Bring back the good old days when members of the Federal Reserve System didn't believe in telegraphing its intentions to the financial markets. The feeling was that if the Federal Reserve did transmit policy decisions to the financial markets in a timely manner, financial markets would be much more volatile with more "discrete" jumps. What the Federal Reserve aimed at was letting the financial markets discover what it was doing as its actions were seen in the market. This way as knowledge spread throughout the financial markets, the adjustments would be made in an incremental fashion and policy would be conducted in a much smoother way.
Well, after all the attempts Mr. Bernanke has made to make the actions of the Federal Reserve more transparent, it is perhaps fitting that his communications with the financial markets have failed once again! And, this frustration at being misunderstood is now producing the need for many others at the Federal Reserve to speak out in an attempt to "set the market straight" on what Mr. Bernanke really said.
Funny that after quite a few years at being misunderstood, the Federal Reserve still believes that it is the fault of others that the misunderstanding exists. Maybe they need to look inward rather than pointing fingers at others.
In my mind, the Bernanke years at the Fed can be divided up into two parts. After the Alan Greenspan Fed (of which Mr. Bernanke was a part), in an effort to combat the possibility of deflation, kept interest rates so low for so long that it created asset bubbles, the Bernanke Fed, now afraid of inflation created the environment for a financial collapse. This was the first part.
After fighting the fear of inflation for too long, Mr. Bernanke and the Fed threw everything they could against the wall in an effort to avoid another Great Depression. (See for example, "Bernanke's Next Round of Spaghetti Tossing" from November 10, 2010.) The battle continues!
The thing is, I believe that the Federal Reserve got caught, once again, in the trap of bad timing. To me, because of events going on in Europe, the movement to higher long-term interest rates had already begun when Mr. Bernanke began to drop hints about the possibility that the Fed might begin tapering bond purchases. European money that had moved to the United States seeking a "safe haven" began to move back into more risky European sovereign debt. (See for example, "Treasury TIPS Break Out: Is This the Move?".)
As this movement took place, the yield on TIPS, which had been negative, rose into positive territory for the first time since the fall of 2011. Mr. Bernanke's early discussions on "tapering" did not generate this.
Mr. Bernanke's statements, especially the one after the Open Market Committee meeting on June 19, gave the financial markets additional impetus to increase yields. However, I believe that yields would have risen anyway because of the situation in European markets.
Now, the remarks about Mr. Bernanke's leaving will have the tendency to make him a "lame duck" which will not make policy making over the next seven months any easier. Why Mr. Obama chose to air the possibility that Mr. Bernanke would be leaving at this time is a mystery to me. Mr. Obama is having enough troubles with economic policy as it is.
Maybe this is one reason why the Federal Reserve is being so defensive about the issue concerning the tapering of bond purchases at this time. The whole situation, however, is not a confidence builder.