Bernanke Press Conference: The Message Was the Medium—News Analysis

FOMC’S middle-of-the-road decision to stand pat left viewers yawning

Federal Reserve Chairman Ben Bernanke had a little something for everyone to hate in his first-ever press conference on Wednesday, and the main message of his middle-of-the-road stance was the medium itself.

Bernanke famously broke ranks with his Fed predecessors when he took over in 2006 by promising greater transparency in his chairmanship of the Federal Open Market Committee. On Wednesday, this promise rang especially true as he answered reporters’ questions about FOMC policies in a televised setting.

But beyond Bernanke’s participation in the central bank’s historic first—but certainly not its last—press conference, he stuck steadily to the FOMC news release’s script, which announced the committee’s continued goal of fostering “maximum employment and price stability.”

Just how the Fed’s policymakers intend to achieve that dual goal is what’s up for debate among market players, pundits and the American public. The big news out of Washington was no news, as the Fed plans to create jobs and avoid inflation by essentially standing pat.

The Fed said that it will complete its second round of quantitative easing, known as QE2, as scheduled on June 30, and there are no plans for QE3—a move that will disappoint those who believe government spending is the only way to assure U.S. job creation. In addition, the Fed left its interest rate policy unchanged—a decision sure to disappoint inflation hawks.

That said, economists have so far responded to Bernanke’s efforts toward greater transparency by playing their usual meta-parlor game of parsing his restrained language to figure out what they think the chairman really was saying.

“Chairman Bernanke was asked about the impact of QE 2 and he responded that it was ‘effective’ and ‘successful,’ ” wrote PNC economists Stuart Hoffman, Robert Dye and Kurt Rankin in a comment released just a couple of hours after the press conference. “He said that the end of QE 2 is unlikely to adversely impact financial markets because Fed intentions have been well broadcast. Reading between the lines, Chairman Bernanke gave some hints about the exit from a historically accommodative Fed policy.”

In other words, the Fed is going to raise rates sooner rather than later, the PNC economists suggested, adding that steps in the unwind are likely to include removing the “extended period” language now referring to the near-zero fed funds rate target, partial or complete ending of reinvestment of maturing assets on the Fed’s bloated balance sheet, interest paid on bank reserves and fed funds rate target hikes and asset sales.

Bank of America Merrill Lynch analysts, meanwhile, said that the FOMC’s stance on inflation remains vigilant. (Though the BofA-Merrill  analysts’ comment was published a couple of hours

after the press conference, they reviewed the FOMC release itself and not Bernanke’s performance at the press conference—clearly an indication that the televised event was more about style than substance.)

“On the inflation front, the FOMC members continued to sound vigilant—they again promised to ‘pay close attention’ to inflation—while acknowledging that higher commodity prices ‘have pushed up inflation in recent months,’ ” the BofA-Merrill economists wrote. “Yet the committee as a whole still sees these increases as ‘transitory,’ with ‘subdued’ underlying inflation and 'stable' longer-term inflation expectations. Given the data, we could see a slight upward revision in the inflation projections for this year or next, but the core PCE inflation forecast is still likely to be 'somewhat low' relative to their implicit target of 2%.”

Adam Patti, CEO of IndexIQ , which launched an inflation-protecting exchange traded fund, IQ Real Return ETF (Ticker: CPI) in late 2009 to provide a real return of 2% to 3% above the U.S. consumer price index’s rate of inflation, said he had a hard time understanding Bernanke’s take on inflation.

“Bernanke comes out and talks about how the rate of inflation is running 6% year to date on an annualized basis,” Patti said. “I guess there’s a technical definition of inflation that Bernanke is using, but actual inflation is rising. Commodity prices are skyrocketing, food prices are higher, oil prices are through the roof. I’m not sure if he’s looking at the same data that we are.”

Still, Patti is a finance professional with a long to-do list, so he didn’t spend much time pondering the issue while watching television.

“I saw a few minutes of the press conference but I turned it off, because I was busy,” he said. “I was interested in hearing what Bernanke had to say, but I caught up with it later by reading some articles about the Fed’s decision.”

The final takeaway? If you really want to figure out what’s going on, read the book before you watch the movie.

Read more about the Bernanke press conference at AdvisorOne.com.

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