Full blown damage control?
Call it the great wagon circling.
Central bankers are talking tough in the face of the wild gyrations in financial markets. But it’s becoming increasingly clear they are sweating – and drawing up contingency plans to assuage the panic that’s taken hold since Chairman Ben Bernanke last week sketched out the Fed’s plan for winding down its QE3 bond-buying program. U.S. policymakers in particular must have predicted investors would react strongly. But now that longer-term borrowing costs have spiked to near a two-year high, they look to be entering full-blown damage control.
Here’s Richard Fisher, head of the Dallas Fed, speaking to reporters in London on Monday:
I’m not surprised by market volatility – markets are manic depressive mechanisms… Collectively we will be tested. We need to expect a market reaction… Even if we reach a situation this year where we dial back (stimulus), we will still be running an accommodative policy.
Indeed, in what looks more and more like a concerted effort, policymakers are urging investors to reconsider the market’s conclusion that the Fed is about to pull the rug out from under the slow economic recovery. They seem to want investors to take a longer view of the policy change that’s fast approaching instead of focusing – as traders tend to do – on the imminent plan to reduce accommodation in the months ahead.
Here’s Narayana Kocherlakota of the Minneapolis Fed, on an impromptu conference call with reporters on Monday:
I think the (Fed’s policy-setting) FOMC, through the remarks of the chairman in the press conference, announced a lot of things that are pretty accommodative. The FOMC announced that it wasn’t intending to sell mortgage backed securities; that will provide more accommodation… What we have seen so far (in the market) is not a cause for concern. But obviously, if these higher yields were to harden over a longer period of time, that would be restrictive to economic conditions.
Even foreign central banks are piping up to help the Fed face down its latest communications challenge. European Central Bank President Mario Draghi went out of his way on Tuesday to assure investors that his bank is nowhere near removing its stimulus for the euro zone. The ECB’s exit from accommodation “is still distant,” Draghi said. Getting in line, Bank of England Governor Mervyn King said markets “jumped the gun” on Bernanke’s comments.
Investors can probably expect much of the same as the week grinds on with New York Fed President William Dudley and Fed Governor Jeremy Stein scheduled to give speeches, among other influential policymakers. The problem as usual will be delivering a nuanced, grey message to a market where it’s often more profitable to think and react in black and white.
Here’s the takeaway from David Ader, head of government bond strategy at CRT Capital:
At the very least, what we are hearing is that the Fed is not happy with the violence or magnitude of the rate increase and ancillary action in other markets and is attempting to offer some caution and clarification to what the FOMC’s message should have been. Reading this another way we’ll extract that the vicious reaction has unnerved the Fed as much as you and I and that if the result of the tapering threat is this sort of confidence draining wealth destruction then the Fed can react accordingly, i.e. go slow on whatever it is that’s behind the price action.