For a central bank that likes to tout the importance of clear communication, the Federal Reserve sure knows how to be obtuse when it wants to. Take Bernanke’s testimony before the Joint Economic Committee of Congress last month. His prepared remarks were reliably dovish, emphasizing weakness in the labor market and offering no hint of an imminent end to the current stimulus program, which involves the monthly purchase of $85 billion in assets.
It was during the question and answer session that the real fireworks came. Asked about the prospect for curtailing such bond buys, Bernanke said:
If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings … take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.
Those three little words, “next few meetings,” proved rather costly to global financial markets – about a trillion bucks a word in stock value losses.
Was it a miscalculation or a trial balloon, investors wondered. Rather hawkish comments from normally dovish regional Fed presidents like Eric Rosengren of Boston and John Williams of San Francisco seemed to cement the notion that this was a concerted message. It remains to be seen how Bernanke will navigate the issue at Wednesday’s press conference, one of only four per year.