Traditionally the art of analysing Fed-Speak is the art of translating mystifying inscrutable language into plain-old English.
But PIMCO’s Mohamed El-Erian feels no need to obey that, as evidenced by his latest piece at FT Alphaville on this morning’s talk.
Anyway, here’s his conclusion:
On the input side, Bernanke’s speech reinforces the general market expectation for QE2 but, critically, does not tell us much about the details. The guessing game will continue.
On the output side, the speech reminds us that the targeted benefits come with the possibility of collateral damage and unintended consequences.
The immediate reactions of markets were interesting as they had much to do with traders’ gut reactions. While they inevitably got influenced by other factors and subsequent analysis—in this case, the realisation that critical QE2 details are still missing—they were informative nevertheless, especially when it came to differences in focus.
Equity traders were quick to draw comfort from the targeted benefits of QE2. The bond and currency markets chose to focus instead on the costs and limitations, with the Treasury yield curve steepening further and the US dollar weakening. In the process, all three markets pointed to the delicate and difficult balance that the FOMC must strike.
So we think that means: Bernanke will definitely introduce QE, but there are clearly risks.