Bernanke Briefings May Offset Fed Hawks With Words as New Tool
When Federal Reserve Chairman Ben S. Bernanke convenes his first press conference next week, he may emphasize a point the markets seem to have forgotten: He’s serious about keeping interest rates low for an "extended period."
Futures markets in Chicago see a 29 percent chance of a rate increase by December, and Eurodollar contracts on interbank lending predict rates of 0.5 percent by year-end -- an imminent tightening encouraged by an inflationary uptick and suggestions from some regional Fed presidents that rates should rise soon.
“Yet again the market is running way ahead of the Fed,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York and a former Fed economist. “Bernanke’s press conferences will help mitigate the influence of some of the FOMC members who are further away from consensus and yet very, very vocal.”
The briefings -- after the Fed’s two-day meetings in April, June and November this year -- may allow Bernanke, like his colleagues in Europe and Japan, to steer or even correct market expectations by making him the first official to explain any central bank actions. Regional presidents who don’t necessarily represent the Fed’s consensus, including Kansas City Fed President Thomas Hoenig, often have spoken first.
Bernanke and his chief deputies on the Federal Open Market Committee -- Fed Vice Chairman Janet Yellen and New York Fed President William C. Dudley -- have used speeches in recent weeks to knock back investor perceptions, based on remarks by Hoenig and several other FOMC members, that the central bank may raise rates before year-end. They have countered that the committee’s leadership believes the threat from accelerating prices will prove “transitory.”
“There has been so much confusion in markets as some of these more peripheral members of the FOMC freely air their views,” Coronado said. A Bernanke press conference “keeps the markets focused on the core message.”
He will speak at 2:15 p.m. after the April meeting, and the statement will be released at 12:30 p.m. Statements after one- day meetings will continue to be released at 2:15 p.m.
The importance of the briefings likely will grow with time, said John Canally, an economist and investment strategist at Boston-based LPL Financial Corp., which oversees $315.6 billion in assets.
"The April 27 presser might be a trial run to work out the kinks and how he handles the questions,’’ said Canally, who added that FOMC meetings with news conferences “will take on more importance,” and eventually the Fed “will do what the ECB does and have one at every meeting. I also think, at the margin, it lessens the importance of the minutes and the daily and weekly parades of Fed speakers.”
Investors have two routes to profit financially from Bernanke’s determination to keep the federal funds rate near zero for an extended period, said Chris Low, chief economist for FTN Financial in New York.
“Those who think the Fed is making a mistake are tending toward the inflation trade: They’re favoring commodities, favoring TIPS,” Low said. “Those who believe the Fed is right are going for conventional fixed-income and extending in duration.”
Lowe agrees with investors who think the Fed is correct.
“If you’re confident that yields are not going to rise, the return on a five-year note at 2.12 percent is so much higher than the 0.69 percent yield on the two-year,” so extending maturity “can pick up a lot of income,” he said.
While Bernanke’s move marks a break with his predecessor, Alan Greenspan -- who communicated primarily through prepared speeches and congressional testimony, rarely speaking to the press -- it follows the precedent of other chief policy makers. The European Central Bank and Bank of Japan hold monthly press conferences, and the Bank of Canada and Bank of England have quarterly sessions.
Both Wim Duisenberg and Jean-Claude Trichet, the first and second presidents of the ECB, have used their briefings to stress -- sometimes explicitly -- that they alone spoke for the Governing Council and investors should look to them for guidance.
At his February 2006 press conference, Trichet said Lorenzo Bini Smaghi “does not speak on behalf of" ECB policy makers after the Executive Board member was reported to have said that he favored higher interest rates. Asked last August about comments on the rate outlook by Slovakia’s Jozef Makuch, Trichet noted that his colleagues ‘‘do not speak on behalf of the Governing Council. I am the porte-parole.’’
Bernanke’s counterparts also have used their press conferences to guide market expectations. In March, Trichet indicated the ECB would raise its benchmark interest rate in April, far faster than investors had anticipated, prompting a jump in the euro.
When the Bank of Japan lowered interest rates to almost zero in February 1999, it didn’t announce the decision in its policy statement, explicitly because it wanted to avoid making money-market rates too volatile, according to then-Governor Masaru Hayami. The statement said only that the bank would ‘‘initially aim around 0.15 percent” and “subsequently induce further decline.”
Speaking at his monthly news conference four days later, Hayami said a “zero rate would be O.K.,” prompting investors to bid down interbank overnight rates to almost zero.
Investor misperceptions in the U.S. have lead to equally swift market moves. Yields on 10-year Treasuries jumped 4 basis points on March 25 in the minutes after Philadelphia Fed President Charles Plosser said -- in a speech titled “EXIT” -- that the improving economy should prompt policy makers to detail a plan for withdrawing record monetary stimulus.
He suggested the Fed sell $125 billion of assets for every quarter-percentage point rise in the benchmark rate and normalize its balance sheet in 12 to 18 months. Yellen has presented a contrasting scenario with a five-year time line for unwinding the central bank’s unconventional asset holdings.
“Investors are often left with the impression, which we believe is incorrect, that the hawkish side is more influential than it actually is,” said Roberto Perli, a former senior staff economist in the Fed’s division of monetary affairs.
“This might be one of the reasons why federal funds futures have systematically and incorrectly predicted an early policy tightening in recent years,” said Perli, now a managing director at International Strategy & Investment Group in Washington.
The yield on the two-year note rose 0.07 percentage point to 0.89 percent on April 1, the highest level since May 2010, after the Labor Department reported the economy added a better- than-expected 216,000 jobs in March and St. Louis Fed President James Bullard said the Fed should consider shrinking its $600 billion asset-purchase program.
Dudley, in San Juan, Puerto Rico, spoke shortly after the jobs report, saying the recovery is “still far from the mark” of the central bank’s goals of price stability and full employment. The 2-year yield dropped 0.09 percentage point, wiping out the earlier gains.
Dudley continued to clarify his point, saying in a Tokyo forum April 11 that “we’re probably going to have excess slack in the U.S. labor market at least through the end of 2012, and that’s one reason that colored my view that we shouldn’t be overly enthusiastic about tightening monetary policy too early.”
Dudley’s remarks and similar comments from Yellen the following week were an attempt from the Fed’s leaders to better manage the market’s belief about the central bank’s policy plans, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, which oversees more than $40 billion in assets.
“It is to adjust expectations and say ‘listen, there are voices of dissent but this is where the central Fed is,’” Swonk said.
Yellen heads a subcommittee the Fed formed at its Nov. 2-3 meeting to review the central bank’s communications strategy. Several participants in a discussion at the Jan. 25-26 meeting said “increased clarity” is “a key objective,” and some “referred to the central role of communications in the monetary-policy transmission process,” according to the minutes.
Yellen outlined in a Feb. 25 New York speech the importance of clarifying the Fed’s intentions, saying the central bank could use communications to make policy more accommodative, lower unemployment and raise the rate of inflation if financial markets expected a tightening of policy before the Fed intended.
If policy makers believe their likeliest course of action is to hold the Fed’s target rate lower for longer “and market participants came to share that view, then financial conditions would become significantly more accommodative, even in the absence of any change in the current level of the funds rate,” Yellen said. At its March 15 meeting, the FOMC agreed that Bernanke will hold regular press conferences after the two-day sessions.
Plosser, a recurrent skeptic of Fed easing who has said interest-rate increases are “on the table” this year, told reporters after an April 1 speech that he welcomes the press conferences.
“I think it’s a good thing; I am a strong believer in transparency and effective communication, so I support the effort,” he said. “Will it change what I say? Ha! I’ll still do what I do.”
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