Bloomberg the Company & Products

Bloomberg Anywhere Login

Bloomberg

Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.

Company

Financial Products

Enterprise Products

Media

Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000

Communications

Industry Products

Media Services

Follow Us

Magazine

BernankeSpeak: A Plus For Investors


Will greater openness be a hallmark of a Bernanke Federal Reserve, much like it was under outgoing Chairman Alan Greenspan? Looks that way, given Ben S. Bernanke's testimony during his confirmation hearings to become the next Fed chairman. And his reassurance isn't just good news for Fed watchers who like to parse every phrase in each policy statement. It also means investors can worry less about their portfolios after the regime change.

Bear in mind that financial markets hate uncertainty. And a Fed discussion paper released in October found that unexpected moves by the central bank can trigger particularly large moves in the prices of stocks around the world.

Fed economist Jon Wongswan looked at 16 stock indexes from Argentina to the U.S. during the period of September, 1998, through November, 2004 (excluding the emergency Sept. 17, 2001, meeting after the terrorist attacks). A surprise 25 basis-point cut in the federal funds rate caused stocks to rise, on average, as little as 0.5% in Malaysia to as much as 2.5% in Korea and Hong Kong. U.S. equities tended to climb about 1.8%, and the German bourse by 1%. Drops of similar magnitudes show up when the unexpected move is a rate hike.

Interestingly, Bernanke himself has studied the effect of surprise Fed moves. He wrote a 2003 paper on the subject with Fed economist Kenneth N. Kuttner. But that paper had a different time frame, so it showed only a 1% reaction in U.S. stocks, less than Wongswan found.

One key area of openness where a Bernanke Fed may differ from the Greenspan era is in the nominee's support for inflation targeting. In his Nov. 15 testimony before the Senate, Bernanke said that a set target range for inflation could have several advantages, "including further reducing public uncertainty about monetary policy and anchoring long-term inflation expectations even more effectively." To the extent that an explicit inflation goal removes the risk of future surprise Fed moves, Bernanke could promote the desire for reduced stock market volatility around the world as another benefit of inflation targeting.

By James Mehring in New York


LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus