By Anthony Harrington
There are a few really good pieces of advice for leaders and politicians. Three of the better axioms are: don't make rules you can't enforce; don't make promises you can't keep; and don't paint yourself into a corner. Federal Reserve Chairman Ben Bernanke more or less ignored all three, as it turned out, when he started talking up tapering in May 2013. With his tenure as Chairman coming to an end in January, Bernanke clearly wanted to leave his successor, whoever that might be, with a decently shaped exit route from quantitative easing (QE). The Fed knew well enough that the markets were gorging on all that cheap money - the fact that equity markets were setting new records would have told him that clearly enough. He also knew, as we all do, that QE cannot go on forever. The trick was to find a way of starting the exit process without sending the markets, which have become addicted in the worst way to easy money, into a frenzy. Bernanke thought he had found the way forward, which we could sum up as "talk before you do". After all, a large part of his philosophy as Fed Chairman has been based around the idea of "transparency," letting the market know in advance where Fed policy was going and why, and then initiating. However, as we all now know, Bernanke's idea of creating more certainty in the market has twisted like a bad knife, and what markets now have, after the Federal Open Market Committee (FOMC) meeting of 18 September, is not certainty but massive uncertainty.
Just about every major bank analyst expected Bernanke to use the FOMC press conference to announce that he was initiating tapering. Debates arose over how much tapering he would introduce, and whether we would see an equal cutback in the amount of bonds and mortgage backed securities the Fed buys each month - or whether it would be skewed in favor of one or the other. The consensus was that he would cut some $10 billion to $15 billion off the Fed's monthly $85 billion buying spree. This was all blown out of the water when the Fed Chairman announced that the moment was not right to introduce tapering and that, in fact, tapering might not be introduced for quite some time. It all depended on the data, he said. As if this was not uncertain enough, he added that the market had become too fixated on an earlier comment by the Fed that tapering would begin when US unemployment dropped below 7%. It might be 7%, it might be 6.5% or it might be lower, it "all depends", and besides he added, the unemployment number isn't a particularly good measure anyway of whether the economy is picking up - which means the market is now left to guess what it will take to get the Fed to act.
If we are to judge Ben Bernanke by whether or not he has managed to inject greater transparency and certainty into the Fed's policy making, we would have to come to the conclusion that he has failed, and failed spectacularly. There is now a complete fog around the question of when the Fed is going to taper and what exact data will prompt the Fed to act.
However, every cloud, as they say, has a silver lining, and this particular embarrassment for the Fed shines particularly brightly for emerging markets (NYSE:EM), which slid into a total crisis when the taper talk started. Immediately after the FOMC announcement, the Indian rupee shot up, emerging market stock markets, which had been getting slaughtered bounced back and, in general, it is safe to say that the decision was warmly welcomed across the EM space. With most EM economies still highly mercantile in nature, dependent on exports rather than on domestic consumption, introducing higher interest rates to protect their currencies from crashing through the floor against the dollar was killing. The Fed's "no taper yet and maybe not for a while" decision is an absolute lifeline for them. It is highly improbable that they will be able to conjure up stronger domestic consumer markets before the Fed flips back into taper talk, but at least they now have a breathing space to get to grips with the scale of the problem confronting them.