Words from the chairman of the Federal Reserve can move the markets–even when he has little to say at all.
When Ben Bernanke talks, investors hold their breath and hope for the best.
As Bernanke cleared his throat at the Economic Club of Chicago luncheon Thursday, markets around the world inhaled deeply. The Dow Jones industrial average flat-lined within a few points of what turned out to be its intraday middle. Then, when Bernanke quit talking, and stopped short of creating any new jitters for investors, the market exhaled in relief.
Moments after the Fed released the text of Bernanke’s speech–in fact, just as he started speaking in Chicago–the Dow began a run that would extend nearly 129 points. It then dropped slightly to close at 11,015.19.
Call it the Bernanke Effect. Or the Hold-Your-Breath Effect. Or perhaps most accurately, the Hold-Your-Breath-Bernanke’s-Talking Effect.
Miles White, chairman of the Economic Club, warned the audience at the packed Palmer House Hilton that every Bernanke utterance faces a host of syntactic dissections.
“His statements are analyzed, examined, parsed, re-examined and interpreted for clues as to which way the monetary winds might be blowing,” White said.
And in his brief time in office, Bernanke has caused a few stock market hurricanes by speaking more freely than most Fed chairmen have.
Markets tumbled in early May after television anchor Maria Bartiromo reported that Bernanke had offhandedly told her that investors had “misinterpreted” his recent remarks to Congress by assuming that the Federal Reserve was done raising interest rates.
Then in early June, Bernanke prompted a nearly 250-point, two-day panic. The cause? In a speech to a bankers’ group in Washington, he made his views on inflation perhaps a bit too clear.
“The medium-term outlook for inflation will receive particular scrutiny,” Bernanke said.
Not exactly “Katie, bar the door” to most of us. But to investors concerned about the steep hike in oil prices, the remark served as proof that the Fed chairman is very, very worried about inflation. That meant more hikes in interest rates seemed certain, a shift in perceptions for many investors.
When Bernanke took charge at the Federal Reserve Bank in February, he signaled an intention to be more direct than his predecessor, longtime Fed Chairman Alan Greenspan.
Greenspan had crafted such a carefully calibrated style of not-quite communication that investors had a name for it. “Greenspeak,” it was called.
Bernanke, by contrast, seemed certain to be more specific and forthcoming. Investors expected him to speak more clearly and let the blue chips, and other markets, fall where they may.
It seemed like a good idea at the time.
To many in the room at the Economic Club speech Thursday, it still seems like a good idea, even when it hurts sometimes. Bernanke’s sometimes shifting statements on inflation have roiled markets throughout his short tenure on the job.
“I much prefer for him to be more direct,” said Tom Bond, a options trader who once served as chairman of the Chicago Board Options Exchange.
Trouble is, Bond noted, Bernanke has changed his views on inflation. He was comfortable about it at first. Then his June 5 remarks seemed to reverse direction.
“Now he’s saying inflation is a problem. Well, which is it?” Bond asked.
Edgar Jannotta, chairman of the Chicago-based investment firm William Blair & Co., said Bernanke’s direct way of speaking is good for everyone.
“The less misunderstanding there is in the markets, the better off we are,” Jannotta said. “People can make rational decisions.”
Even so, there are those who prefer a little more circumspection in their Federal Reserve Board chairmen.
“The Fed chairman has to be more oracular, if that’s an adjective, given the influence he has,” said Marshall Bouton, president of the Chicago Council on Foreign Relations. “It sort of goes with the role.”
Thursday’s speech had the potential to roil the markets. Bernanke’s chosen topic–the impact of rising energy prices on economic activity–is both complicated and controversial.
But in his speech, Bernanke seemed intent on making only measured and careful remarks. The jump in energy and commodity prices “could account for some of the recent pickup in core inflation,” he said.
The fear of inflation, almost as much as inflation itself, can be a factor in slowing growth, Bernanke observed. Inflation expectations have risen lately but not beyond their range in recent years, he said. In fact, inflation fears may have eased somewhat in the past month.
“These developments bear watching,” Bernanke said.
For any Fed chairman, the most dangerous time to speak comes after the formal remarks are finished. Bernanke gamely took questions from the audience, though in written form that, if typical Economic Club custom was followed, he had a chance to view beforehand.
Asked about the growing trade deficit, Bernanke smiled wanly and stated, “Thanks. This will take a while.”
Noting that the current account deficit has grown from $100 billion in 1995 to $800 billion last year, Bernanke said it cannot keep rising that fast without significant consequences.
“The current account deficit is not just a U.S. problem. It’s a global issue. It’s a systemic issue,” he said.
For the record, and in an effort to reflect Bernanke’s remarks as clearly as possible, the Fed chairman was unequivocal about at least one question on the minds of all Chicagoans.
Asked if he roots for the Chicago Cubs or the Chicago White Sox, Bernanke had a swift, direct reply, one that was unlikely to rankle either side of the city.
“Whichever team is in town,” he said.
