UPDATE: Since publishing this post, we have added reactions by Alex Pollock and John Makin.
Despite his best efforts, Bernanke keeps moving markets. He calmly said that the Fed will keep buying $85 billion of bonds each month. He reported that the forecast for inflation was stable.
But in a déjà vu of May 22nd, markets dipped during Wednesday’s press conference when Bernanke hinted QE tapering could begin this year. By the closing bell yesterday, the Dow had lost 205.96 points, NASDAQ was down 38.98, and the S&P 500 was down 22.88. The downward slide continued today in the market’s worst one-day point decline since Nov. 9, 2011.
There’s mass confusion about what happens next. Gone are the days at the beginning of QE when it seemed that clear thresholds would determine the taper. Markets are jumping between the FOMC statement and press conference, nervous for any sign suggesting Bernanke could “pull his foot off of the accelerator,” so to speak.
It takes a genius to sort through this uncertainty. Fortunately, we have AEI scholars. Here’s what they are thinking about the future of QE (and Bernanke himself):
“There were two pieces of language in the first paragraph [of the FOMC report] that I thought were really relevant. The first concerned the characterization of the labor market. The previous meeting statement had said “some” improvement. This one said “further” improvement. So I get the sense the Fed thinks that they are further along with the labor market improvement that they would need to see before they could start tapering. . . The other thing that I thought was important is they downplayed somewhat the low inflation readings we’ve been getting. . . I think Bullard dissented because he thought this statement was too hawkish.” Steve Oliner.
“Frankly, the way economic conditions look now, what with unemployment rate stuck around 7.5, 7.6 and inflation going down, we’re not going to change anything for a while. . . I’m afraid the Fed with the help of some other central banks which have also muddied their messages, has actually made things worse. . . So if you ask me what they are going to do in September, right now I have no idea.” John Makin.
“[Bernanke] will be done by the end of the year and the only question is whether he goes sooner than that. . . my guess is he probably is going to stick around towards the end of the year because he wants to start the tapering himself. . .” Kevin Hassett.
“The irony of Mr. Bernanke’s poor communication with the market is that he might have created market conditions that will ensure that the economy is not strong enough for him to either start tapering by the end of 2013 or to end the program by mid-2014 as he suggested he might do at yesterday’s press conference.” Desmond Lachman.
“Benjamin Strong, the leading Federal Reserve actor of his day, famously decided to give “a little coup de whiskey to the stock market” in 1927. Ben Bernanke, in contrast, gave the stock and bond markets a barrel of whiskey. We will observe how bad the hangover will be.” Alex Pollock.
“Premature monetary austerity is more dangerous than the premature fiscal austerity visited on Europe in 2010-11. Now fiscal austerity is much criticized. Soon monetary austerity will be even more unpopular and the Fed will be talking about un-tapering.” John Makin.
The whole discussion of QE tapering is a lot like hokey pokey. Bernanke’s the leader. “Put your [QE] in. Put your [QE] out.” (Pause a moment to imagine it). The markets dutifully copying his every move. Shaking all about.
There’s only one major difference. In hokey pokey, you know what comes next.