When Pilate saw that he could prevail nothing, but that rather a tumult was made, he took water, and washed his hands before the multitude, saying, ‘I am innocent of the blood of this just person: see ye to it.’” (Matthew 27:24)
On August 9, the Federal Open Market Committee and its chairman, Ben Bernanke, released its bi-monthly statement. To promote economic growth and ensure that the velocity of inflation was kept at bay, the committee once again concluded that exceptionally low interest rates were warranted. The target range for the federal funds rate would remain in the 0%-.25% range. No surprises there.
What was surprising was what came after that. In each of the five previous statements the FOMC released in 2011, the committee included a nebulous timeframe for the low interest rate environment. “For an extended period” was the phrase we’d become accustomed to hearing.
But as the markets reeled in the wake of S&P’s unprecedented downgrade of the U.S. credit rating following an embarrassing debt-ceiling debate, the Fed unexpectedly changed the script. The extended period now had a window. “At least through mid-2013,” was what they said.
Never in recent memory has a Fed chair divulged a specific timeframe for changes in monetary policy. Economies are dynamic and require flexibility. Paul Volcker would never have given us a time frame. Same goes for Alan Greenspan. And here was Ben Bernanke—a smart man, whether you like him or not—giving us dates. Peculiar, don’t you think?
What wasn’t peculiar was how the market reacted. After it was certain that money would be cheap for at least two more years, whatever panic selling was taking place ceased. Portfolio managers who had been sitting on the sidelines, arms folded in disgust at the way the debt-ceiling debate was handled, began to put money to work. The buyers’ strike was over and the market rallied, gaining back a nice chunk of what was lost in the early August earthquake. (The aftershocks continue, as we saw this week, but mainly because of Europe.)
But what’s good for the markets isn’t necessarily good for the U.S. economy. So why did he do it?
How about this for a theory: just because a Fed chair would never go on record as criticizing a sitting administration doesn’t mean he can’t do it in his own way.
That’s right, folks. By saying that the low-interest-rate environment would last through mid-2013, Ben Bernanke reassured one and all that he and the Fed do not anticipate a better outlook for the U.S. economy for at least two more years.
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