As the world financial markets (and a chorus of market commentators) react negatively to the latest policy guidance from the U.S. Federal Reserve and its Chairman Ben Bernanke regarding the duration of its "extraordinary" monetary accommodation and bond purchasing, it may be helpful to look beyond the headlines and the chart lines into the mind of the Fed Chairman during the two day meeting and its aftermath:
I know I've got a problem here somewhat of my own making. I've tried to run this herd of cats on the Committee like a good faculty chair, letting them all talk, talk, talk, even out in public. Hawks, doves, pigeons, they all think they know what exactly we should do: they should try sitting in this Chair (good luck Janet!). And now its gotten so bad in terms of the diversity of opinions especially about the QE thing that it has been really confusing the markets, especially those idiots in the Treasury market. (Is there any apparently intelligent life more stupid than a pack of bond traders?)
Even the great 'Fed Whisperer' (and future biographer -- in your dreams!) John Hilsenrath screwed up his opinion piece on my remarks to Congress, where I was trying to set things right. He first wrote that we were going to announce at this June meeting that we would be cutting QE later thus year 'as long as the economy doesn't disappoint.' That was worth three straight triple-digit down days on the Dow, John! What were YOU thinking? What I actually said was we might do some tapering but only if the economic, employment and inflation situation continued to get better, and sustainably so. But you did try to fix things later in the same week by you last pre-meeting post, I'll give you that. But we're still in a muddle because I've got to get these actual Fed Governors in line with your opinion (not to mention, mine).
Now I've got to put up with another day of this constant bickering over QE -- I guess I just let this go on too long in public, and even Williams, Dudley and Yellen couldn't fix things up by making some hawkish noises to try to mollify the hard money types. So I've go to do it myself, if I want to finish up my term in a positive fashion and not quacking like the lame duck I could wind up. (Good luck, Janet!) By the way, thanks for nothing, Barack: you think you could have maybe picked up the phone to tell me it's time to go before you told Charlie Rose?)
Do Fisher and Plosser and their ilk really think I'm going to give up on everything I believe in during my final days? They really ought to go into bond trading. But maybe there's a way I can shut them up in public just enough for me to get out of this place with my reputation intact. I'll never satisfy Ms. George out in Kansas City (everything's up to date out there, except her): she thinks we should just quit QE, while we're behind!
And good old Jim Bullard has at least come through with a dissent from the Right -- quelle surprise, as Holly Golightly would say -- actually I agree with him in principle that it's too soon to talk about clamping down, but the QE cat's out of the bag anyway, and he helps balance off that dead-ender George. (Maybe Obama will start thinking about Jim as a compromise candidate since he talks like a hawk but votes like a dove -- Barack would like that!)
So here's my idea for keeping the hawks and doves in line after the meeting. First I'll give a nod to the hawks and agree the economy is getting better, and set out a tentative timetable for drawing back QE -- say late this year through mid-summer next year IF (but only if) the economy keeps improving and inflation expectations pick up and unemployment goes down to the levels we're going to project in our new forecast. I said before it all depends on the "outlook" so we'll give the markets an outlook tied to QE tapering. Then the hawks can't go out and say we don't have a credible "exit strategy" -- and heck, it's all based on our own agreed forecasts!
Then I'll give and to the doves by very publicly sticking with the line that "it all depends on the data" and reaffirming that we'll keep the funds rate as is until at least when unemployment gets down to 6.5 percent and even say we might stretch that out further. The hawks haven't been too tough on that score, and the doves can't say we're caving in to bond vigilantes.
What I figure is that the markets won't like the assertion that QE is going to go away at some point and that the exit strategy is serious, and the bond idiots will probably run up the 10-years to 2.50 or even beyond - which makes no sense given that inflation is still quite tame (and that will drag down the stock market too I suppose). But hopefully our "friends" in the press will eventually get the point and clarify that it's all still data dependent. Meanwhile when all my esteemed colleagues start speaking again a week or so after this meeting, they too will express some degree of satisfaction about the plan, and be more careful about going over the top with their comments and making markets worse. The real problem has not been our policy, but the idea that the Fed is fractured by dissension so why should anybody believe us anymore.
I know I'll get blamed for all the market downside, but at least we'll have gotten the 'exit strategy' monkey off our back -- once you've done that, you don't have to go through that adjustment again. The market needs to just take a deep breath.
But the bad news is that we have to depend on the bond traders to finally get it right. We don't want the ten-year at 2.50 or worse, and they know that -- they will try to push us to 'say it ain't so, Ben' -- but that ain't going to happen. They will have to watch the actual data just like us (but we'll have to get the minutes just right so we don't repeat another market melt in three weeks time). Boy I'm glad I'm getting out of here!"