by Elliot Turner
Dear Dr. Bernanke,
You have taken much heat in your time as Chairman of the Federal Reserve Bank and it’s about time we all stand up to applaud you for a job well done. Dr. Bernanke, in recent months you were dealt a nearly impossible hand. Interest rates are at the zero-bound and Congress was left both unwilling and unable to act when capital markets experienced a turbulent storm in the second quarter. Meanwhile, the panic in asset prices expressed caution over the future state of economic growth, while economic indicators pointed to a continued, albeit sluggish bounce-back in GDP.
You were the only one in position to act and you had the fewest tools at your disposal with which to make a move. Instead of just folding your hand, instead of just giving up, you added the tool of language to your arsenal and masterfully maneuvered through the pathway to quantiative easing. What exactly do I mean by this? Well many wanted all-out QE2 in the middle of the second and third quarters. Many wanted you to unleash the monetary policy equivalent of “shock and awe.” Many wanted more, more, more. And suddenly, once you opened up to the idea, everyone wanted less. Not just less, the voice of the many wanted nothing at all from you.
To get to that point you did a wonderful job in shaping expectations. As you have made clear, by far the biggest risk facing our economy has been-- and continues to be-- a deflationary spiral. In response, people had been pricing in a new normal to economic growth, whereby our country would fail to reach our inflation target and bonds were the one reprieve in the quest for yield. Rather than simply sitting idly by, or jumping into the deep end, you took the middle ground.
And something happened on the way to cool and calm deliberation: the fear in our capital markets turned from deflation to inflation on account of your openness to embrace quantitative easing. You patiently shaped the expectations in our capital markets and of the decision-makers in our economy to reflect the reality you want to create, and by the time the ball was in your court to act, you had already accomplished a large part of your task. Even before you pegged a number to QE2, market behavior started reflecting the fact that you would do everything in your power in order to stimulate inflation in our economy and that’s a good thing!
In doing so, you made it safe for people to invest in equities again. Not to say that valuations weren’t compelling in their own right, but too many feared the proverbial “value trap” where what is seemingly good value today will wither away in the doldrums of a Japanese-style malaise.
The most impressive part is that in the end, by telegraphing your message in the proper manner, you were able to gain the same overall impact with a far smaller package of quantitative easing than the war-drums were calling for during the rash of “uncertainty” over the past few months. Your language was so effective to the point where those who were calling for QE2 started calling for no QE altogether, while applauding the present “not so bad” path of economic recovery. In the end, you were left in such a position that no one was disappointed, and all feel a large sense of relief.
Dr. Bernanke, you have left our markets and economic actors with the opinion that under your watch, the Federal Reserve Bank will stop at nothing short of our 2% target inflation rate and that expectation leads to action. With your all clear, people can once again realized they can invest in equities while taking the real kinds of long-term risks that pay long-term rewards. You, Dr. Bernanke, are the real Maestro.