Federal Reserve | timiacono.com - Part 55

Did Bernanke Do That on Purpose?

Yesterday’s Fed policy statement was a curious one. What could have motivated it?

The choice of words to describe the health of the U.S. economy in the form of “significant downside risks to the economic outlook” is clearly what has sent financial markets reeling in the last 20 hours or so and the curious thing about it is that it is so out of character for the central bank.

They are normally an optimistic lot and, after making clear with QE2 last year that one of their policy goals was higher stock prices, why on earth would they choose this point in time to suddenly express the gravest of concerns for the economy?

It’s not likely that they casually added the words “significant downside risks” to the statement and they must have known what kind of impact they would have.

A look back at the policy statements in mid-2008 – about nine months into the recession that had yet to be declared and leading up to the worst financial market turmoil since the Great Depression – they expressed very little concern about how things were going.

In the Fed policy statement from August 5th, 2008, we got these comforting words:

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee.

It wasn’t until the day after the Lehman bankruptcy that downside risks were clearly characterized as “significant”, as seen from the September 16th, 2008 statement.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee.

What should one make of this seeming contradiction between then and now?

Well, the Republican’s letter to the Fed Chairman was probably a factor. To what extent, we’ll never know, but, if I were the Chairman of an independent central bank and I got that kind of letter, I’d certainly want to respond in some way.

Maybe, the Fed Chief figured he’d show them a thing or two about who wields the bigger bully pulpit and, if that was the case, then he has certainly succeeded, so far.

Another possibility is that Bernanke figured another massive bond buying program – in the form of a $1+ trillion QE3 program – would ultimately be needed and, given all the political posturing about how unpopular (and unsuccessful) QE2 was, he’d need some pretty big cover to pull that off and a tanking stock market would go a long way in filling that bill.

My guess is that it was a combination of the two.

Mr. Market to Mr. Bernanke: “Me No Likey”

Well, it looks as though the stock market isn’t too impressed with Operation Twist so far. I’ve not yet scanned the other news, but, based on the sell-off beginning at around 2:30 PM EST and then accelerating into the close of trading, it’s a pretty safe bet that markets were expecting something more from the Fed. After seeing the least volatility in months over the last week or so, stocks are suddenly volatile again as we move further into the two most dangerous months of the year with the Fed now sitting on their hands.

Look for more big swings after today’s 284 point plunge for the Dow (down 323 points from the intraday high just before the Fed policy statement was released). And it was going so good there for stocks last week when everyone thought that the Fed had their back.

What Did the Fed Do?

The Federal Reserve’s policy making committee should have concluded their meeting in Washington a few moments ago and, unfortunately, we’re far away from a computer right now on the Beartooth Highway. We’ll probably listen in to Bloomberg Radio now and then to hear what happened, but won’t be able to provide any comments until later in the day.

It is probably safe to post the graphic to the right, the one that normally appears here on Fed meeting days, since a change in short-term interest rates isn’t likely.

It’s been updated to reflect last month’s decision to lengthen their extended low rate pledge to at least mid-2013.


Ben Bernanke’s easy money policies are really putting his predecessor to shame, something that few would have thought possible a few years ago.

By the time mid-2013 rolls around, that will make a whopping five-and-a-half years of ZIRP, a similar span last time around seeing rates climb back to 5.25 percent in mid-2006, yet another reminder of how unprecedented these times are.

Anyway, my guess is we’ll get “Operation Twist” today (for all the good that will do) and, perhaps, a change in the policy statement that hints at doing more (if necessary), but that the stock market will be disappointed by it all.

Bernanke should have never made those comments last time around about how higher stock prices are, effectively, the Federal Reserve’s third mandate.

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What Will the Fed Do?

After the Republic leadership in Congress sent a letter to Federal Reserve Chairman Ben Bernanke yesterday urging he and his fellow central bankers to refrain from any more monetary stimulus to aid the economy (and, not uncoincidentally, President Obama’s election chances), the Fed’s meeting today has gotten a bit more interesting.

See video link in Links.txt

The letter was signed by Senators Mitch McConnell and Jon Kyl along with Representatives John Boehner and Eric Cantor and, while they do make a few good points, such as, the dismal results of prior money printing efforts and the potential for further intervention to harm the U.S. economy, it was rather unusual (unprecedented?) and bordered on bullying.

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