Roll up, roll up – welcome to the great taper farce
We are at the stage of the financial cycle where central banks turn into circuses and central bankers become the circus performers. The market is transfixed by the show, watching every move and trying to anticipate what trick or shock will come next.
What is interesting about this particular circus is that the Ringmaster is about to leave, their replacement is turning into a whole new show of its own.
A circus analogy is not a bad way of describing what’s going on in the US’s Federal Reserve at the moment. Federal Reserve bankers have to be a bit like the lion tamers and use their skills to try to manipulate the market into submission and overcome its wild tendencies. Like the lion tamers and acrobats of the circus, US central bankers are under the spotlight all the time. Just as the acrobat can’t take a millimetre step in the wrong direction, or the lion tamer can’t crack his whip in a new way for fear of getting his hand chopped off by an irritated lion, so the central banker has to adopt similar accuracy in his speech and even demeanour.
Bernanke and the rest of the top brass at the FOMC speak in careful tones, they commit to nothing and when they are bold, as Bernanke was during some Fed testimony to the US Congress back in May, they spend the ensuing weeks trying to back-track and dilute their words. Even the schedule of speakers at the upcoming Jackson Hole central bankers’ conference looks like it has been designed to be as neutral as possible. The Fed’s Lockhart said he wouldn’t rule out a September taper, a few minutes later the Fed’s Bullard said that the Fed is in no rush to taper and it should take its time to make such a decision.
The vice-chair of the Federal Reserve and front-runner to take over from Bernanke in early 2014, Janet Yellen, is only hosting a panel discussion. Presumably this was designed to stop the market from reading into her every word and causing carnage in the markets if she gave a full blown actual speech.
A subtle shift in Fed policy (at the end of the day the Fed will still be buying assets even with tapering, and interest rates are likely to remain low for some time), means that this circus will be rolling into towns across the globe in the coming weeks. After the Jackson Hole conference the next show will be the September Non-Farm Payrolls report on 6th September. By the time the all-important next Fed meeting takes place on 18th September, the markets will most likely be apoplectic with anticipation.