Are Markets Finally Getting Bernanke's Message?
Markets might finally be getting the Federal Reserve's not-so-simple message about how it plans to support the economic recovery.
Since late last year, Fed Chairman Ben S. Bernanke and other officials have been trying to make a distinction between the central bank's policy on short-term interest rates and its plans for the bond-buying program known as quantitative easing. They have consistently said that the Fed's rate target will stay near zero until after the economy strengthens. On the bond buying, by contrast, they have indicated that the amount of monthly purchases will depend on the pace of the recovery.
As of last month, the subtleties of the Fed's message were largely lost on the market. When Bernanke sought on June 19 to clarify plans for quantitative easing, investors took his words as a signal that the Fed would be removing all stimulus sooner than previously thought. By June 24, prices in futures markets suggested the Fed would raise its interest-rate target to 0.25 percent no later than June 2014, compared with an expectation of November 2014 before the clarification.
Since then, Fed officials have kept trying to stress the difference between their guidance on interest-rate policy and their plans for quantitative easing -- an effort that Bernanke extended in his testimony to Congress today.
"We think of these two tools as having somewhat different roles," his prepared remarks read. "We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low -- our second tool -- to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels."
The immediate response in futures markets indicates he's finally connecting. As of about 9:30, an hour after his testimony was published, the expected date of the Fed's first rate increase to 0.25 percent had moved to October 2014, very close to where it was before the confusion erupted in June. Granted, much progress had already been made in recent weeks: The expected date stood at September 2014 before the testimony was released.
Whether the Fed should be trying to make the distinction at all is another question. As Bloomberg View and columnist Justin Wolfers have argued, the central bank would probably be a lot more effective if it simply sent one clear, stimulative message to the market. The ultimate goal of both interest-rate policy and quantitative easing, after all, is to get people back to work and avoid permanent damage to the economy.
(Mark Whitehouse is a member of the Bloomberg View editorial board. Follow him on Twitter.)