Remember those great commercials from the early 1980s for the now-defunct brokerage E.F. Hutton? "When E.F. Hutton talks, people listen," was the famous tagline. Well, today's version of E.F. Hutton is Federal Reserve Chairman Ben Bernanke. Whenever Bernanke speaks, investors and traders stop what they're doing and listen with rapt attention.
And sometimes they act on his words, as they did a month ago, when Bernanke's musings about the possible end of the Fed's latest bond buying program (QE3) started a massive sell-off in stocks and bonds. But market pros and the media pay far too much attention to the Fed chairman's utterances. Not that they're unimportant; as I wrote earlier this year, the late Martin Zweig called Fed policy "the dominant factor in determining the stock market's major direction."
But Bernanke has said many times that the Fed's actions depend entirely on economic events that are unpredictable and beyond his control. And unlike the imperious Alan Greenspan, who hung around for 18½ years, Bernanke will go quietly when his second term ends in January. Then he may write a memoir and earn millions in speaking fees. But he's already a lame duck.
On the first point -- being at the mercy of unpredictable economic events -- here's what he said at a June 19th news conference:
If the incoming data are broadly consistent with this forecast [of moderate improvement in the economy], the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year…[and] we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year. (emphasis added)
Literal-minded traders took that as a definitive statement of the Fed's intentions. Starting on June 19, the Standard & Poor's 500 index tumbled from an intraday high of 1652.45 to a low of 1560.33 on June 24, a drop of 5.5% in just four trading days. Yields on the benchmark 10-year Treasury note, which have been trending upward since last fall, peaked at 2.7% a couple of weeks ago. They'd gained half a percentage point since the day before the news conference.
Terrified that stocks could -- heaven forbid -- actually go down, other Fed governors, and Bernanke himself, stepped in to reassure markets. Equities then moved to all-time highs, while a countertrend rally in bonds drove10 -year rates back down to 2.5%. Actually, the Fed chairman has made similar statements going back to May, and the gist of them is: All things must come to an end and so will QE3. But when it occurs depends strictly on the economy.
Or, as he testified before Congress last week: "I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course."
What Could Really Kill the Bull Market
Bernanke prides himself on his transparency, and indeed his Fed is an open book compared with the Secrets of the Temple days under the great Paul Volcker. Back in the 1980s, the Fed didn't hold news conferences, nor did it even announce interest rate moves. Fed watchers employed by Wall Street firms had to glean the news indirectly. But with openness, has come confusion, especially when Bernanke lays out all the options in classic "on the one hand, on the other hand" economist fashion.
The truth is, the Fed can't commit to a future course of action that depends on what actually happens in the economy, because that's unpredictable by definition. Meanwhile, investors keep looking for certainty in an uncertain world. June's experience showed that sitting tight would have been the smart move. And yet everybody seemed to miss the single most definitive thing Bernanke said at that ill-fated June 19 press conference: "Any need to consider applying the brakes by raising short-term rates is still far in the future."
Ending QE3 may take the froth out of stocks, and it would likely cause bond rates to move higher. But it won't kill the bull market in equities, as raising short-term rates very well may. And as Bernanke said, that's "far in the future," and will be decided by his successor. Whether that turns out to be Vice Chair Janet Yellen or -- hopefully not -- former Treasury Secretary Larry Summers, the FOMC is likely to continue the easy money policy we've seen under both Greenspan and Bernanke.
The economic recovery is just too weak and inflation too low for this Fed to tighten soon, especially with China slowing and Europe and Japan just bumping along. "With unemployment still high ... and with inflation running below the Committee's longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future," Bernanke reiterated last week.
He won't testify again before Congress as Fed chairman; he's scheduled to give two more news conferences this year. He's clearly using the rest of his term to shore up his legacy, and point the way for a successor, who may or may not follow his path. And while he's still the most important central banker in the world, his influence is waning daily. That's why, as Ben Bernanke prepares to move on, so should we.