Opinion

Anatole Kaletsky

Yellen’s remarkably unremarkable news conference – and why it’s a good thing

Anatole Kaletsky
Jun 19, 2014 20:03 UTC

Yellen holds a news conference following two-day Federal Open Market Committee meeting at the Federal Reserve in WashingtonJohn Maynard Keynes famously said that his highest ambition was to make economic policy as boring as dentistry. In this respect, as in so many others, Federal Reserve Chair Janet Yellen is proving to be a loyal Keynesian.

Yellen’s second news conference as Fed chair conveyed no new information about the timing of future interest rate moves. She gave no hints about an “exit strategy” for the Fed to return the $3 trillion of bonds it has acquired to the private sector. She told us nothing about the Fed’s expectations on inflation, employment and economic growth — not even about the board’s views on financial volatility, regulation, asset prices or bank credit policies.

Yellen refused even to repeat, or repeal, her earlier answer to a question about the meaning of the “considerable period” she expected between the end of tapering and the first rate hike. At her first news conference, Yellen responded to a similar question by blurting out “six months.” This caused an eruption of volatility in financial markets — that lasted about five minutes.

This time Yellen decided to do no such favors for the high-frequency traders on Wall Street. Instead she gave the same frustrating answer to every question about the Fed’s future plans: “It depends.”

Traders work at the kiosk that trades Time Warner Cable on the floor of the New York Stock ExchangeTo quote one of many examples: “There is no mechanical formula whatsoever for what a considerable time means. It depends on how the economy progresses. We will be looking at the progress we make in achieving our labor market objective and inflation objective.”

Yellen looks toward a Keynesian approach

Anatole Kaletsky
Feb 13, 2014 19:18 UTC

This has been a banner week for the world economy, inspired largely by events in the United States.

In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.

The significance of Yellen’s testimony lay not in the fact that she was a bit more “dovish” than former Chairman Ben Bernanke, or seemed more committed to the new central bankers’ fad for “forward guidance,” as opposed to “quantitative easing.” More striking, if subtle, was the change in economic philosophy that Yellen represented.

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

Have markets finally received Bernanke’s taper message?

Anatole Kaletsky
Dec 19, 2013 16:33 UTC

Thanks goodness it’s over. Financial market behavior ahead of last night’s announcement by Ben Bernanke on a gradual reduction in U.S. monetary stimulus has been tedious and irritating, rather like listening to whining children in the back of the car on a long journey: “Daddy, are we there yet?” In fact, impatient whining about when the Fed might start to “taper” has spoiled for many investors what should have been one of the most enjoyable financial journeys of all time, scaling previously unexplored market peaks and passing through unprecedented monetary vistas.

Imagine if everyone had simply taken Ben Bernanke at his word when he said in May that the Fed would continue buying bonds at the rate of $85 billion every month until it was absolutely confident that unemployment was on the way to 6.5 percent and that the scale of these purchases would only be increased or diminished if and when a change was clearly warranted by economic statistics. Investors would then have concluded, as I suggested at the time, that no significant changes in U.S. monetary policy were likely until the end of 2013.

Stock markets around the would have enjoyed their strongest year for a decade without the trauma of the spring and summer “taper tantrum.” Nobody would have been shocked or embarrassed by the “September surprise,” when the Fed very sensibly decided to keep up the pace of monetary stimulus in the face of lackluster economic figures, despite the howls of indignation from analysts who were wrong-footed by their own unsubstantiated predictions of early tapering. Finally, investors would have been fully prepared for the Fed’s decision to go ahead with tapering this week. After all, the recent strong run of U.S. employment, housing and production data provided exactly the sort of strong economic background that Bernanke had posited all along as the necessary condition for tapering, especially in conjunction with the Congressional budget deal that was ratified by the Senate at the same moment Bernanke as spoke across town.

With hostage taking over, a Washington deal beckons

Anatole Kaletsky
Oct 24, 2013 15:37 UTC

Nobody should be surprised that Wall Street hit new records this week. After all, the U.S. has just witnessed the end of a sensational hostage crisis that was threatening national security and undermining economic confidence — and even more sensationally, this was the second such crisis in two months.

John Boehner was held hostage by Republican hardliners until last Thursday, when the U.S. Congress voted to continue pumping money into the U.S. government. The fiscal militants forced Boehner to endanger the U.S. economy with threats of a Treasury default. Boehner reluctantly paid this rhetorical ransom in order to preserve the appearance of party unity and therefore his own credibility as a political leader.

Now consider events a month earlier on the other side of Washington. Until September 18, when the Federal Reserve voted to continue pumping money into the U.S. bond market, Ben Bernanke was arguably held hostage by the Fed’s hardliners. The monetary militants forced Bernanke to endanger the U.S. economic recovery with threats of a premature end to quantitative easing. Bernanke reluctantly paid this rhetorical ransom in order to preserve the appearance of institutional unity and therefore his own credibility as an economic leader.

The markets and Bernanke’s “taper tantrums”

Anatole Kaletsky
Sep 19, 2013 16:22 UTC

So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since May 21, when Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve Board’s monetary expansion. Throughout these four months, I have argued in this column that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as evidenced by the huge moves in share prices, currencies and bonds on Wednesday after the Fed announced that it would do exactly what Bernanke had suggested all along — namely, nothing.

The Fed’s decision not to cut back on its $85 billion of monthly bond purchases, even by some small symbolic amount such as $5 billion, stunned the markets — but only because analysts had refused to believe what Bernanke, along with most other central bankers around the world, was saying throughout the period since May 21. The Fed chairman repeatedly stated that tapering would begin only if and when there was consistent evidence that U.S. employment conditions were improving. Bernanke also stated that, even after tapering started, the Fed would not allow U.S. monetary conditions to tighten and would keep short-term interest rates near zero for a very long period — at least until 2015, and quite possibly beyond.

Why, then, were investors so surprised when the Fed officially implemented exactly what Bernanke had promised? And now that the Fed has put its money where Bernanke’s mouth was, how will the global economy and financial markets react?

The new long-term bull market ahead

Anatole Kaletsky
Jul 18, 2013 15:06 UTC

The bull market in global equities that started in the dark days of early 2009 passed a historic milestone this week. When the Standard & Poor’s 500 Index closed on Monday at 1682.5, this did not just represent a new record high and a full recovery from the swoon that Wall Street suffered after Ben Bernanke’s “tapering” comments in late May. More importantly, Monday’s record close marked the first time this key Wall Street index exceeded by more than 10 percent its peak at the climax of the last great bull market in March 2000.

Why is this important? Because a breakout this large from a trading range that has confined the stock market’s movements for many years is historically a rare event. In fact, there have only been three occasions in the past 100 years when prices have risen 10 percent above previous long-term peaks (which I define as peaks that have remained unbroken for at least five years). Each of these major breaks —  in July 1925, December 1954 and October 1980 — has confirmed a structural bull market and been followed by very large gains for long-term equity investors: 189 percent from 1925 to 1929, 245 percent from 1954 to 1973 and more than 1,000 percent from 1981 to 2000. Of course, past performance is not necessarily a guide to future results and three events are insufficient to draw statistically reliable conclusions. Nevertheless, the shattering of Wall Street records this week seems significant in several ways.

The S&P 500 is by far the most important stock market index and tends to set the direction for all other markets around the world — and history reveals that large breakthroughs, like the one that occurred this week, are very different from marginal new highs, which have been much more common and have often given false signals. There have been dozens of cases where long-standing records were broken by 2 or 3 percent and several of these were followed by large losses instead of further gains. This happened most recently in 2007, when the S&P 500 squeaked through to a new high just 2.5 percent above the 2000 record and then promptly collapsed during the Lehman crisis.  By contrast, large breakouts of 10 percent or more have consistently produced large gains.

Were Bernanke’s comments a fire drill or a false alarm?

Anatole Kaletsky
Jul 11, 2013 14:14 UTC

Whenever Alan Greenspan was praised for delivering a clear message on U.S. monetary policy, he liked to reply something along the lines of: “If you think that, you have misunderstood what I said.” Ben Bernanke prefers the opposite approach. On May 22, he triggered one of biggest financial panics since 2008 by raising the possibility of reducing the Fed’s record-breaking monetary stimulus, while admitting that he had no idea when to start this process. He spent the subsequent six weeks trying to clear up the mess that he had created by explaining in painstaking detail the precise timing and conditions under which “tapering” might or might not take place. In the process he created even greater confusion and financial volatility. It now appears that he would have done much better for the world economy — and for his own reputation — by saving his breath and imitating Greenspan’s obfuscation.

The Fed minutes published on Wednesday revealed so many divergent opinions on the conditions, timing and even direction of any change in monetary policy, that all the recent speeches and press conferences on tapering could reasonably be described as white noise. Which raises the question of why investors reacted so strongly to all this confusion. Recent market behavior around the world suggests an explanation: while Fed tapering was not in itself a very important issue, Bernanke’s comments acted as a financial alarm bell, drawing attention to risks in the world economy that were forgotten or ignored. When we hear a fire alarm we naturally ask ourselves three questions: Is it a false alarm? Is it a fire drill? Or is it a real fire — and if so, where?

Similar questions may shed some light on the tapering scare. For the U.S. stock market, Bernanke’s May comments were clearly a false alarm, since the Fed was nowhere near a decision to tighten monetary policy, as we now know officially from the minutes. It is not surprising, therefore, that U.S. equity prices have rebounded to their pre-Bernanke record highs. But looking beyond the U.S. stock market, tapering speculation seems more like a fire drill than a false alarm.

Are markets making another blunder?

Anatole Kaletsky
Jun 20, 2013 14:50 UTC

In the four weeks since Ben Bernanke first mentioned that the Federal Reserve Board might start to taper its program of quantitative easing (QE) later this year, more than $2 trillion was wiped off the value of global stock markets — and probably far more from the value of global bonds, which is harder to estimate.

On Wednesday Bernanke spent almost an hour answering press questions to try to clarify the Fed’s policy on interest rates and QE. The result was a further steep fall in equity and bond prices around the world. Does this mean that Bernanke did not really want to signal to, and pacify, financial markets and was trying, instead, to prepare investors for higher interest rates and tougher times ahead? Or is it possible that the market has simply misunderstood his comments, both at Wednesday’s press conference and in his statement on May 22?

I have argued repeatedly in this column for the last interpretation — that tapering would not begin before the end of this year and that financial markets have misinterpreted the Fed’s intentions, partly for reasons connected with the vested interests of analysts and traders, whose livelihoods depend on convincing the world that economic policy is highly volatile and uncertain. If monetary policy were predictable and stable, which is essentially what Bernanke has promised, then the status and salaries of Fed-watchers in Washington would be hard to justify and the profits of short-term macroeconomic speculators would disappear. But maybe this view was simply wrong.

The many interpretations of Ben Bernanke

Anatole Kaletsky
May 23, 2013 16:05 UTC

Federal Reserve Board Chairman Ben Bernanke testifies before Congress in Washington, May 22, 2013. REUTERS/Gary Camero

On Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about U.S. monetary policy he has been making since last September.

The Federal Reserve, Bernanke said, would continue buying $85 billion of bonds monthly until it was confident of reducing unemployment to 6.5 percent. The scale of these purchases might be increased or diminished – but only if and when such shifts were warranted by economic statistics. Now, he said, there is no case for a change in either direction.

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