The many interpretations of Ben Bernanke

May 27 2013, 03:02 IST
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SummaryOn Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about US monetary policy he has been making since last September.

Anatole Kaletsky

The reaction to Bernanke’s tediously familiar statement was among the wildest gyrations seen in the world’s financial markets for months

On Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about US monetary policy he has been making since last September.

The Federal Reserve, Bernanke said, would continue buying $85 billion of bonds monthly until it was confident of reducing unemployment to 6.5%. The scale of these purchases might be increased or diminished—but only if and when such shifts were warranted by economic statistics. Now, he said, there is no case for a change in either direction.

The reaction to this tediously familiar statement, which was followed by publication of the equally repetitive minutes of the last Fed policy meeting, was some of the wildest gyrations seen in the world’s financial markets for months.

As Bernanke spoke, Wall Street soared to its highest level ever, since the Fed chairman had clearly contradicted speculation about an early tightening of monetary policy. An hour later, however, prices slumped far below their opening levels, as the speculation of tightening revived among investors who claimed to read new meaning into Bernanke’s familiar phrases.

The speculation spread to Tokyo Thursday. Markets there had their biggest one-day swoon since the 2011 tsunami. By the end of the day, tens of billions of dollars in Tokyo and New York had probably been redistributed among speculators who had put different interpretations on Bernanke’s words.

Why did the financial world react in this manic-depressive way to a statement that was bland and predictable? Why do investors keep gambling vast sums of money in speculations on changes in monetary policy when Bernanke has tried to make crystal clear that significant changes are unlikely, at least until the end of the year? Given this unusually clear guidance, why don’t investors just forget about monetary policy, at least until autumn, and focus instead on economic fundamentals or corporate financial results?

Some investors may genuinely not believe Bernanke’s message. They may be paying attention to the small number of Fed officials, including Philadelphia Fed President Charles Plosser, who disagree with the chairman’s unlimited monetary stimulus. But we know these dissidents play no serious role in monetary decisions. So their followers in the market must surely be few and far between.

The other possibility is that many investors may rationally understand that the Fed will stick to its current course, but still

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