CREDIT SUISSE: The Great Irony Of Ben Bernanke’s ‘Transparency’

Ben bernanke microphone

Ben Bernanke’s Federal Reserve has prided itself on transparency.

With the federal funds rate pushed to its zero lower bound for years, “communication” has been the central bank’s major, if not only, chip left to play.

That is, through “forward guidance” the bank has endeavoured to tell us what long-term interest rates will look like.

So it’s ironic, writes Credit Suisse’s Neal Soss, that markets were doubly surprised by the Fed’s first hint of a taper of its asset purchasing program and then again by its no taper decision yesterday.

“Ideas that seem reasonable in the long run become uncomfortably constraining the closer in time they come,” Soss writes to clients. “We have seen this with the 6.5% unemployment rate threshold for low interest rates, the 7% unemployment rate marker for the end of QE3, and the mid-June pronouncement that tapering may begin later this year.”

Simply put, transparency is hard stuff, according to Soss.

Looking forward, all we can do is watch the factors FOMC policymakers cited in their unexpected decision not to taper today — economic data that support or cast doubt on their expectations for continued growth and improving labour market conditions, financial market conditions (especially mortgage rates), and the potential for continued restraint from fiscal policy. While we expected today’s meeting would bring more short
-run monetary policy visibility, the reality is that the FOMC has left the markets guessing.

To be sure, Bernanke stressed that the decision came down to economic data and was not some bait-and-switch. He downplayed the claim that the “Septaper” was somehow a sure thing. “I don’t recall stating that we would do any particular thing at this meeting,” he told reporters.

Still: “In the spirit of ‘watch what they do, not what they say,’ it’s hard to know now what to make of the repeated and nearly universal references by Fed officials to taper,” Soss writes. “When push came to shove, those words didn’t carry the day.”