Do or do not. There is no try.
That’s what I thought as I listened to Ben Bernanke discuss reducing the Fed’s asset purchases, then “clarify” his remarks, then testify before Congress that the Fed will remain accommodative. Prior to the Fed’s competing mandates—stable inflation, full employment, financial stability—comes one operational priority: clear communication. In the face of Fed uncertainty, investors have been known to panic.
But Bernanke’s mind trick seems to have worked. After falling 10%, the US equity market has rallied to new highs. After rising ¾ of a percent, 10-year bond yields have stabilized at 2 ½ percent. The markets seem to understand that while higher rates are inevitable, they aren’t imminent. The Chairman may not have levitated the markets, but he’s at least kept them from going over to the dark side.
Still, it’s going to continue to be a monumental task: weaning the economy off the gobs of easy money it has become accustomed to. The Fed now has a $3.5 trillion balance sheet—four times its size prior to the Financial Crisis. Those reserves represent a significant risk.
Because the Fed itself is significant: the cost of money surrounds and penetrates everything; it binds the markets together. It’s what gives the Fed its power. If Ben’s getting too old for this sort of thing, his successor needs to be a true Master as well.
Douglas R. Tengdin, CFA
Chief Investment Officer