Bernanke's new formula for pleasing investors

Published on NewsOK Modified: December 19, 2013 at 4:18 pm •  Published: December 19, 2013
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WASHINGTON (AP) — In his final performance, Ben Bernanke rewrote the script.

Investors had been on edge for months about when the Federal Reserve might slow its economic stimulus. A pullback in the Fed's bond purchases, they feared, could jack up interest rates and whack stocks. Bernanke's mere mention of the possibility in June had sent stocks tumbling.

So on Wednesday, Bernanke showed something he'd learned from leading the Fed and addressing the public for eight years: Tough news goes down best when it's mixed with a little sweetener.

At his last news conference as chairman, he explained that the Fed would trim its monthly bond purchases by $10 billion to $75 billion — a prospect that had worried the markets.

Yet Bernanke also calmed nerves by walking back a plan to consider raising short-term rates once unemployment reaches 6.5 percent from the current 7 percent.

That 6.5 percent threshold the Fed had been using? Not much of a threshold anymore. The Fed now says it expects to keep its key short-term rate near zero "well past" the time that unemployment falls below 6.5 percent.

The message: The Fed expects low-cost loans to boost the economy for, well, for a very long time.

Investors rejoiced Wednesday by sending the Dow Jones industrial average rocketing nearly 300 points to a record. On Thursday, those gains generally held as stocks finished mostly flat.

It means that five years after the Fed responded to the financial crisis by cutting its key short-term rate to near zero, it has no plans to change course. Low rates encourage spending, hiring and investing. At the same time, critics say it can inflate dangerous bubbles in stocks, housing and other assets.

Bernanke's remarks suggested that three factors had led him to the balance he struck Wednesday: The unemployment rate can be misleading. The Fed wants to avoid setting unrealistic expectations. And inflation remains so low that it poses a potential problem for the economy.

"It comes out of the danger that you're getting so specific with these unemployment rates, you end up in a situation where you put yourself in a corner," said Wells Fargo chief economist John Silvia. "Sometimes you can be too specific and too transparent, certainly in the uncertain world of economics."

With the Fed essentially dropping the 6.5 percent unemployment threshold, Bernanke signaled that he now sees greater public transparency — a longtime priority of his as chairman — as being somewhat flawed. It also means his likely successor, Janet Yellen, will feel at liberty to show similar flexibility.

Though the Fed will be scaling back its monthly bond purchases, Bernanke called the buying of Treasurys and mortgage bonds merely a "supplementary tool" compared with the "main tool" of the Fed's benchmark short-term rate. Multiple rounds of bond buying since 2008 have caused the Fed's balance sheet to balloon to a record $4 trillion.

At his December 2012 news conference, Bernanke had announced the 6.5 percent unemployment threshold as a way to "allow the markets to respond quickly and promptly to changes" in Fed policy and act "like an automatic stabilizer."

"We're transparent about what's going to determine our policy in the future," Bernanke said then.



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