Dammit, Bernanke! What Did You Do?
December 18 was an exciting day for the markets. Equities edged lower pretty much from the moment the exchanges opened until about 2:00 pm, when the Federal Open Market Committee of the Federal Reserve concluded a two-day policy meeting and announced that, after much waiting and fan fare, tapering would begin. The flow rate of purchases conducted under quantitative easing would be reduced by $10 billion to $75 billion per month.
However, far from throwing a tantrum, equity markets rallied and closed the day near record highs. Although the news took many by surprise — the January meeting was a popular bet for the announcement — investors had been preparing for a taper for months. The exact date of its arrival was far less consequential than its severity and context, and the taper was not severe and the context was appropriate.
The impact was, all things considered, pretty modest. The yield on the benchmark 10-year Treasury note jumped around a lot following the announcement and was up only about 5 basis points the following day.
Ben Bernanke, who held his final press conference as Chair of the Fed on December 18, did more than simply announce the taper. He managed to announce the taper without sending equities crashing or sending yields skyrocketing, and with (apparently) complete confidence that the time was finally right after what looked like two hesitant missteps earlier in the year.
In other words: he didn’t screw it up. During his tenure as Fed Chair Bernanke instituted and began to pare back the most ambitious monetary strategy in U.S. history. Wall Street will remember him as the person who saved the banks, and the Fed will remember him as a successful crisis-era Chair who took bold, unprecedented action to help save an economy on the brink of catastrophe, and he did it with fiscal headwinds howling in his face.
Main Street, though, may remember him differently, and the mixed interpretation of the taper announcement is evidence of his mixed reputation with the public. Many Americans suspect that QE has done little to help the “real economy,” (that is, Main Street), and that monetary stimulus has done more to support an institutionally corrupt financial industry than anything.
The extent to which this is true or not is unclear. Certainly the Fed’s accomodative monetary policy has been a critical factor in the recovery of the housing market, which is about as real as macroeconomic conditions get for many Americans.
A low interest rate environment absolutely helps corporate profits and has helped send the stock market to record highs, and while it stinks of tired theories about trickle-down economics, this has helped Main Street at least somewhat.
But perhaps the most significant thing that Bernanke did at his final press conference — the thing that has financial markets in a good mood, pundits confused about whether or not the taper was announced with a hawkish or dovish tone (the right answer is probably both), and much of Main Street feeling like they’re still being hung out to dry — is make it clear that the Fed will carry the financial markets on it back if it has to to get the nation through this recovery, apparently no matter what the cost. At this point, the Fed has dug in so deep that it can’t do anything else. The recovery — real or otherwise — depends on monetary stimulus.
The gesture was contained in a revision the Fed’s 6.5 percent unemployment target. In the announcement, the Fed stated that it could be appropriate to maintain an accomodative monetary position even after unemployment falls below 6.5 percent, which could happen in the coming year according to the Fed’s own projections.
This suggests that even as the U.S. approaches full employment (somewhere between 5.2 and 5.8 percent unemployment), the recovery could still be so fragile that without Fed stimulus it would fall apart. The markets know that the Fed would not willingly let this happen, so stimulus must continue, and it will likely continue for a while. Bernanke indicated that QE could be wrapped up come the end of 2014, but his estimates for the QE timeline have changed in the past. And even then, policymakers aren’t expect to begin tightening its core interest rate policy until 2015.