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: