Let me put this bluntly: Bernanke did not communicate effectively. His message and presentation were both poor.
I do not mean that he is substantively wrong, just that he did not effectively communicate his message. As regular readers know, I have been one of his biggest supporters. What went wrong?
Style and Leadership. I would be among the last to criticize an academic style -- in most settings. When it comes to the Fed, many regular people are looking for wisdom and leadership. There is a large market audience that he could not persuade no matter what he said, but he still has a mission. It is possible to acknowledge some uncertainty and still communicate effectively.
As I have demonstrated in as series of recent articles (start here), the main effect from QE II was a sense of confidence that the Fed would not allow deflation. That remains an important mission.
The presentation required some energy and a sense of leadership and confidence. The market observers are about 4-1 Fed enemies, so they are prepared to apply a haircut to anything said. It is not good enough to come out "flat."
Economic Forecasts. The Fed Chair laid out the forecast without much explanation and with plenty of waffling. Most market types do not understand economics or long-term trends. They all engage in "pop econ." It has been so long since we have had a solid economy, and there is so much carping, that many believe the long-term economic trend is negative. Unless there is stimulus, they expect things to get worse. This is wrong -- so, so wrong, and the Fed Chair is Educator-in-Chief. He keeps talking about returning to trend, but does not explain what that means. Most do not get it.
Stimulus. This was the biggest blunder. He did actually say that by maintaining the balance sheet they were continuing stimulus. No one noticed, since it was not presented effectively. In fact, the market confuses the end of QE II purchases with the end of stimulus. Anyone who read a newspaper before this event knew that the market was clamoring for more stimulus to rescue the economy. They are all wrong, of course, but that is their perception. Then there are those who think that the QEs created inflation all over the world. They are also wrong, of course, but that is their perception.
The Fed Chair had an opportunity to clarify either or both points, but squandered the chance. He needed to emphasize that by maintaining the current, all-time record balance sheet the Fed has the pedal on the floor - more that at any time in history.
The QE II program is extraordinary stimulus that has not yet hit the economy. Almost no one seems to understand this, and those who do are not given much "air time."
The Agenda. Bernanke does not understand the press conference format. If he has a message, he must get it into his statement. Once he has completed that he is at the mercy of the questions. His statement was the typical wooden, committee-drafted presentation.
Control of the agenda virtually controls the outcome. Surrendering control is a big mistake, one that is well-understood by political scientists.
The New Fed Transparency
If the Fed wants to use press conferences to achieve a new level of transparency, it must be done correctly.
In April I expressed the concern that the press conference innovation demanded too much from the Fed Chair. We are already asking for a wide range of very special skills. Effective communication in front of a sharp questioning audience is yet another dimension.
Bernanke did OK in the first press conference, but this time he came out flat. While watching, I was remembering my April post on the subject, but I give full marks to Doug Kass who tweeted that Bernanke needed a press secretary. Effectively, this means that the format does not work.
Where does this leave us?
Eventually, the economy, earnings, and the market will all find the right level. At the moment, the general state of misunderstanding continues -- negative sentiment, good opportunity. Short-term negative, long-term positive.