On Wednesday, Bernanke caught everyone by surprise by announcing the continuation of his $85 billion per month asset purchasing program also known as Quantitative Easing (QE). I’m surprised markets are surprised.
Since about April, the conversation between Bernanke and the market went something like this:
Bernanke: If economic data warrants it, we will be considering the tapering of our bond buying program — the QE.
Market: Taper is coming!
Bernanke: But first there must be signs of the economy improving.
Market: He’s gonna do it, he’s gonna do it!
Bernanke: Guys, guys, listen to what I’m saying. Taper will be data driven. Before I see the improving data, like unemployment in the 6% range, there will be no taper.
Market: Run for the hills!
The reason behind everyone’s surprise could make a great topic for a PhD dissertation in psychology. Perhaps the surprise was driven by the market failure to distinguish between what they wanted Bernanke to do and what Bernanke was likely to do. One can approve of what Bernanke is doing, one can hate it, but it’s all irrelevant. It doesn’t matter whether we think QE is good or bad. What matters is what Bernanke thinks about it, or more precisely about the economy, because he’s holding the reins here. No amount of vitriol and attacks from the market participants over the years have made him change his course. Some would have gotten the message by now, but looks like very few did. That’s how yesterday’s “surprise” over Bernanke’s continuing the QE can be explained.
Bernanke is justifiably surprised that the market wasn’t paying attention at all to what he was saying.
"But Mr. Bernanke suggested that some investors were not paying sufficient attention, pointing to his past promises not to change policy until economic data — unemployment numbers, in particular — showed significant improvement."
”Asset purchases are not on a preset course,” he said with audible frustration. “They’ve always been conditional on the data.”
Perhaps market participants had disagreements about the economic data that was coming out from government agencies. I know that some people are skeptical about the inflation data coming from the BLS. There are people who measure inflation by the prices they see at the gas station or in the dairy aisle. Because they think that government-produced data is a fraud, they base their investment decisions on such stand-alone anecdotes. That’s fine. But what they fail to incorporate into their analysis is what they think Bernanke thinks about inflation. He’s hardly basing his QE decisions on what he saw at the gas station. Even if we assume that the data coming out of CBO and BLS is flawed, this is the data that Bernanke looks at when he makes his QE decisions, and it’s safe to assume that conspiracy and distrust of those numbers is the last thing on his mind.
Conspiracy, however, is not something that even Wall Street’s top economists are shying away from. "Michael Gapen, the chief U.S. economist at Barclays, said on Wednesday that he believed the Fed had purposely misled investors to push up interest rates and knock out speculation in risky financial products."
Right. It takes some amount of self-delusion to think that Bernanke spent the last few months losing his sleep over a bunch of speculators rather than over the broader U.S. economy. Wall Street speculation is a byproduct of Bernanke’s attempts at keeping the interest rates low and the least of Bernanke’s concerns. The frustration of many from failure to predict something so easily predictable is understandable. But sometimes, a Fed chairman’s words have to be taken at face value. Bernanke does not speak in cryptic language like his predecessor Greenspan, and the seven years of his tenure should have been more than enough for everyone paying attention to realize that. With Bernanke, the simplest explanation is usually the most plausible one.
The Fed, however vilified and disparaged, is our last resort to stay afloat. Bernanke is the only one actually doing something about the economy with the tools available to him. Yes, it’s artificial, yes it has a vague exit strategy, but without the QE Wall Street would have been deprived of the last few years’ rally in stocks and bonds. And yet, it’s the Wall Street that’s most vocally upset about the QE. Bernanke would rather they said thank you and went on their way.