Shoulda, woulda, coulda. It's been a week since Federal Reserve Chairman Ben Bernanke "surprised" financial markets by telling them exactly what they expected, yet the whining is still going strong.
If only Bernanke had been clearer at his June 19 news conference. He said too much. He said too little. He should have said nothing at all. He was too blunt. Too indecisive. He should have reassured the markets. (Saying the Fed sees signs of an improving economy isn't reassuring?)
Poor Ben. This is one tough audience - especially when it's on the wrong side of a trade.
Grow up, people. It's time to stop blaming Bernanke for your losses. Either you weren't listening or you heard only what you wanted to hear.
In early May, the Wall Street Journal's Jon Hilsenrath, widely viewed as Bernanke's unofficial spokesman, told us the Fed had begun to map out an exit from its $85 billion-a-month asset purchase program. Then, on May 22, when Bernanke testified to Congress, he provided a time frame: at one of the Fed's "next few meetings." The stock market had a brief hiccup. Treasury yields continued their climb: a cumulative increase of about 100 basis points for the 10-year note since May 2.
When Bloomberg News surveyed economists on June 4 and 5, more than three-quarters said they expected the Fed to start tapering quantitative easing in the fourth quarter of this year. Bernanke ratified those expectations last week, even as he stressed that any such action was data-dependent and "in no way predetermined."
He reiterated the idea of variable QE, introduced at his March 20 news conference: buying fewer bonds if the economy improves, more if it sags. He even introduced a new guidepost: an expected unemployment rate of 7 percent by the time QE winds down a year from now. And once again, Bernanke emphasized that the proposed actions were contingent on progress in meeting employment and inflation objectives. His comments were replete with such qualifiers.
Did he make himself clear? Crystal clear. I can only guess that the whiners are misconstruing the conditional nature of the forecast as a lack of clarity.
You can take issue with the Fed's choice of thresholds. You can disagree with the Fed's economic projections. You can even accuse the Fed of being too cavalier about falling inflation, something St. Louis Fed President James Bullard did in a statement last week. But the one thing you cannot do, in good conscience, is accuse Bernanke of being unclear.
Fed officials were genuinely surprised by the market reaction, with prices of stocks, bonds and commodities plummeting across the globe. In their world, outcomes are supposed to mimic expectations. By clearly communicating the Fed's objectives, policymakers should be able to mold expectations and influence outcomes. The future is now, in other words.
That theory works better in textbooks and econometric models than in the real world. What if the Fed's forecast is wrong? Some traders, with a different set of expectations, are willing to bet that it is. Others want to unwind trades before everyone heads for the exit. Even if they heard Bernanke say that any increase in the funds rate is "far in the future," they decided the beginning of the end was as good a time as any to call it quits.
For the equity market, interest rates are just one consideration in pricing shares. The rise in rates can be easily overwhelmed by better earnings as a result of stronger growth. If the Fed's optimistic outlook is correct, stocks should make a complete recovery.
Not so the bond market, where expectations about the overnight rate are the key determinant in setting long-term rates. Whether that rate starts to rise in 2015, as most Fed officials expect, or sooner, the markets are sensing the turn in the cycle.