Somewhere Ben Bernanke Was Smiling

In the midst of watching both the stock market and the FOMC snippets today, I had to laugh at the twitter backlash that seemed to follow the statement the FOMC Chairman Janet Yellen was making in her first meeting. The FED did what the street seemed to think it would do and cut QE by 10 billion dollars per month, evenly split between mortgage backed securities and treasury bonds. (Business Insider)

It was, in my opinion, a short statement which I am almost positive that Yellen was trying to keep the markets calm with her first FOMC meeting as chair. As she kept talking though, things started to get a little dicey. While investors listened to Yellen speak, their reaction to the seemingly “slightly hawkish” outlook on the federal funds rate the 10 year treasury rate spiked up as did futures for the FFR.

The tone in a WSJ article by Jon Hilsenrath, seemed to take the stance that Ms. Yellen had made a little bit of a rookie mistake here in how she handled the conference and that the markets probably should not worry too much about this. I have written before that I think the rising rate environment is quite good for the economy especially the banking sector which is just once again starting to do more than tread water.

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Yellen tried to make the point that the committee was steadfast on leaving rates low for the foreseeable future but another metric that came out spooked investors as well.

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This dot chart was what really seemed to spook investors in late trading hours and sent both the FFR futures contracts soaring as well as the ten year as I think people underestimated the hawkishness of the FOMC in the short run.

I think it is prudent for everyone to remember though, that Janet Yellen has been a steadfast dove in recent years and that this first news conference needs to be taken with a grain of salt. I do not know if she had any indication as to how the stock market was reacting during her statements, but she did even make a point as to say that she was going to try and make her statements as little of a source of instability as possible. At that point I smiled and realized that Ben Bernanke had to have enjoyed a comment like that as he got hammered throughout the latter parts of his career for supposedly lacking clarity in some of his statements.

I maintain the view that a rising rate environment is a continued sign of the overall health of the economy, even if the weather held things down a bit at the end/beginning of the year. Banks need to be what leads the markets into the next leg up of this long bull market and the rising rates should be a bit of a silencer to the naysayers of the economy overall.

5 thoughts on “Somewhere Ben Bernanke Was Smiling

  1. lippmanb

    I agree with you about Yellen’s rookie mistake. It made me want to smile too. The rising rates are integral to America’s economic growth because investment will help increase output and raise the value of the dollar compared to other currencies.

  2. nickcoll

    That chart is really interesting. From the looks of it, the Fed is going to keep interest rates low until 2016. Yellen is making a prediction that the economy will be healthy by 2015 and this will allow the Fed to end open-market purchases.

  3. alexfigu@umich.edu'alexfigu

    Interesting article. Today’s market reaction is definitely an over reaction to Yellen’s new role. It will be interesting to see if Yellen will be able to have more calming effects during future FOMC meetings or if such a reaction is inevitable. Only time will tell.

  4. viczhou

    Very insightful analysis! Compared to Bernanke, Yellen did make the FOMC minutes more transparent to the markets, which in my view is due to fewer uncertainties about the tapering, as well as her personality. I also agree with you that the banking sector should be what leads the markets up based on rising rates onward.

  5. mrosidi

    Interesting post. When someone sit on the Fed chairman, I think she/he can no longer act as if she/he is a hawkish or a dove.

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