Federal Reserve Chairman Ben Bernanke is finding out that too much communication can be just as confusing for markets as too little. Since 2006, when he took over as chairman of the nation’s central bank, Bernanke has championed more openness about the Fed’s policymaking thought process. Now, as he tries to provide jumpy financial markets with some guidance on how the central bank will scale back the current exceptional mix of stimulative bond buying and rock-bottom interest rates that it has been applying since 2008, the task is proving tricky.
GOING LONG: Bernanke Got It Right
The flood of information that the formerly secretive central bank now puts out sometimes leads to turmoil — the more so when financial markets are as intently poised to leap into action as they are now, out of fear of missing an interest rate turn.
Bernanke’s first effort to lay out a rough route for paring back the Fed’s bond buying followed a June 18-19 policy-setting meeting and triggered a frenzy in global markets. Investors jumped to the conclusion that his remarks signaled an earlier-than-expected end to near-zero interest rates. September shot to the fore as the predicted date for the Fed to start reducing bond purchases, and bondholders rushed to the exits, dumping holdings and sending rates soaring by about a full percentage point on 10-year Treasury notes.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The earliest the Fed is likely to act is later in the year, however. A September turning point was and remains too early. Instead, it’s likely to be December, and possibly not until next year, before the monetary gurus will move, after they see solid and lasting signs of economic recovery — including more robust labor markets.
What’s more, easing up on the volume of bond buying isn’t yoked to a hike in official interest rates. The two steps are, in fact, separate elements of a broader Fed drive to reinvigorate the economy by pumping liquidity into it. And there is little likelihood the central bank will start lifting rates before 2015. Edgy market participants confused the two elements.
Now Bernanke is trying again to paint a complete, and nuanced, picture of what’s ahead, telling a blue-ribbon National Bureau of Economic Research crowd that an easy-money policy remains necessary for the foreseeable future. His July 10 speech expressing that view followed release of the minutes from the mid-June Federal Open Market Committee meeting and was clearly a bid to steady spooked market players. The minutes themselves were far from clear. Although they noted that many of the 19 central bank members need to see solid labor gains before tapering off on bond buying, and many saw bond buying continuing into 2014, the minutes also indicated that about half of the Fed members favored ending the economic stimulus program late this year. The split illustrates the divergence of views among policymakers about the best course to follow.
For clarity, listen to Bernanke’s own words. “Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” he told a questioner. That doesn’t indicate an imminent change in either interest rates or quantitative easing.
The takeaway from all this? Bond investors should stay calm, looking for rates to rise gradually over the next one or two years. A turn toward a cycle of higher short-term rates was always part of market expectations, and you can count on the market to overshoot at times. Interest rates will eventually rise, to a level the economy can bear. But relatively slow current and anticipated rates of GDP expansion mean they won’t soar to the stratosphere and stay there. Periods of exceptional volatility are to be expected, however, as price levels seek equilibrium. But keep your eye on the horizon, not on the immediate turmoil.
-
Gen X Retirement Is in Trouble: Here's What You Can DoEven as they approach retirement age, half of Gen Xers have not done any retirement planning.
-
10 Ways Your 1031 Exchange Can Go Horribly WrongDon't let your tax-saving strategy become a financial nightmare — discover the hidden pitfalls that could turn your 1031 exchange into a costly disaster.
-
Europe Faces Economic and Political Headwinds Next YearThe Letter Challenges for Europe: Potential tariffs, high energy prices and more competition from China will weigh on the bloc in 2025.
-
Don't Sleep on Japan's Economic TransformationThe Letter After almost three lost decades, Japan — one of the world's biggest economies — is finally showing signs of life.
-
Kiplinger Outlook: Telecom Companies Brace for Tough TimesThe Letter The telecom industry is entering a new era that threatens profitability. But the coming Trump administration will make it easier for the major players to adjust.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
China's Economy Faces Darkening OutlookThe Letter What the slowdown in China means for U.S. businesses.
-
AI Start-ups Keep Scoring Huge SumsThe Kiplinger Letter Investors continue to make bigger bets on artificial intelligence start-ups, even for small teams with no revenue. Some backers think a startling tech breakthrough is near.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
