When Bernanke Speaks You Should Listen


November 29, 2016, 5:15pm EST


Yesterday I talked about how an OPEC cut on oil production would/should accelerate the Fed’s plan for interest rate hikes next year.

Interestingly, the former Fed Chair himself, Ben Bernanke, wrote a post today on the internet talking about the Fed’s rate path and its quarterly projections (which we looked at yesterday).

Like his post in August, where he interpreted a shift in the Fed’s communications strategy for us, the media, which is always following the latest shiny object, didn’t pick up on it then, didn’t pick up on his message about the Bank of Japan’s actions in September, and has barely reported on his new post today (to this point).

When Bernanke speaks, for anyone that cares about the direction of markets, interest rates and the economy — we should all be listening.

Let’s talk about some of the nuggets Bernanke has offered in recent months, to those that are listening, through simple blog posts.  And then we’ll look at what he said today.

Remember, this is the man with the most intimate knowledge of where the world has been over the past decade, what it’s vulnerable to, and what the probable outcomes look like for the global economy.  He advises one of the biggest hedge funds in the world, the biggest bond fund in the world and one of the most important central banks in the world (the BOJ), and clearly still has a lot of influence at the Fed.

Back in August he wrote a piece criticizing the Fed for being too optimistic in its projections for the path of interest rates. He said that the Fed’s forward guidance of the past two years has led to a tightening in financial conditions, which has led to weaker growth, lower market interest rates and lower inflation. In plain English, consumers and businesses start playing defense if they think rates are on course to be dramatically higher, and that leads to lower inflation and lower growth. The opposite of the Fed’s desired outcome.

With that, Bernanke thought they should be taking the opposite approach, and suggested it may already be underway at the Fed (i.e. they should underestimate future growth and the rate path, and therefore possibly stimulate economic activity with that message).

It just so happens that Yellen has been speaking from this script ever since.  They’ve ratcheted down expectations of the rate path, and in her more recent comments she’s said the Fed should let the economy run hot (to give it some momentum without bridling it with higher rates).

Then in September, after the BOJ surprised with some new wrinkles in their QE plan, Bernanke wrote a post emphasizing the importance of their new target of a zero yield on their 10 year government bond. The media and markets gave the BOJ’s move little attention.  It was as if Bernanke was acting as the communications director for the BOJ.

He posted that day saying that the BOJ’s new policy moves were effectively a bigger QE program. Instead of telling us the size of purchase, they’re telling us the price on which they will either or buy or sell to maintain. He said, if the market decides to dump Japanese government bonds, the BOJ could end up buying more (maybe a lot more) than their current 80 trillion yen a year.

Bernanke also called the move to peg rates, a stealth monetary financing of government spending (which can be a stealth debt monetization).  The market has indeed pushed bond prices lower since, which has pushed yields back above zero, and as Bernanke suggested, the BOJ is now in unlimited QE mode (buying unlimited amounts of bonds as long as the 10 year yield remains above a zero interest rate). That’s two for two for Bernanke interpreting for us, what looks like a complicated policy environment.

So what did he talk about today?  Today he criticized Fed members for sending confusing messages about monetary policy through their frequent speeches and interviews that take place between Fed meetings. But most importantly, he seemed to be setting the table for another 180 from the Fed on their economic projections at their December meeting.

Remember, they went from forecasting four hikes for 2016, to dialing it back dramatically just three months into the year.  Now, with the backdrop for a $1 trillion fiscal stimulus package finally coming down the pike, to relieve monetary policy, the outlook has changed for markets, and likely the Fed as well.

With that, Bernanke seems to be trying to give everyone a little heads up, to reduce the shock that may come from seeing a Fed path, in it’s coming December projections, that may/will likely show expectations of more aggressive rate hikes next year — perhaps projecting four hikes again for the year ahead (as they did into the close of last year).

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