April 29, 2011

Parsing Bernanke: First Trust’s Brian Wesbury on How Fed Chief’s Words Translate to Action—Weekend Interview

Fed will begin raising rates ‘early in 2012,’ Wesbury says

If you want insight into what Fed Chairman Ben Bernanke really means behind the carefully crafted politico-speak, you talk to Brian Wesbury—so AdvisorOne did just that on Thursday. The chief economist with First Trust Advisors in Wheaton, Ill., is a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago and served as chief economist for the Joint Economic Committee of the U.S. Congress in the mid-1990s.

Brian WesburyThe Wall Street Journal ranked Wesbury (left) as the nation’s No. 1 U.S. economic forecaster in 2001 and USA Today ranked him among the nation’s top 10 forecasters in 2004. In case you’re throwing an event, Speakers Platform named him a Top 5 Keynote Speaker in 2011.

Wesbury, an eternal optimist, published his latest book, “It’s Not As Bad As You Think,” in November 2009, arguably during the market “valley” to end all market valleys.

Q: Were there any surprises from Bernanke’s press conference on Wednesday, or was it more about the novelty of having a Fed chairman answer questions in that setting?

A: I try to remind people that this press conference was about 20 years in the making. Politicians have been calling for more transparency at the Fed for some time, so it wasn’t like Ben Bernanke suddenly thought of this. I know [Rep.] Ron Paul, and [Sen.] Jim Bunning before him, have been calling for it for a while. That said; the Fed has taken extraordinary measures—through quantitative easing and growing the federal government’s balance sheet—to deal with all that’s happening in the economy. There are signs this is coming to an end, obviously. And some of the regional Fed presidents have raised their voices in disagreement (or at least concern) over the central bank’s actions.

Q: Is it common for regional presidents to criticize the chairman?

A: Traditionally, no; they usually like to run a tight ship and speak with more of a unified voice. That was certainly the case with Paul Volcker, which eventually got him into trouble with dissenting votes. But Bernanke seems to relish debate and dissent. It’s more of an academic environment, which fits with his background.

In light of the surge in oil and gold, among other things, which is at least in part tied to monetary policy, “crazy things” have been happening, which I know is a very technical term.

As a result, Bernanke felt now was the time for transparency and a full airing of views. I don’t want to overstate the political aspects of the debate, but certainly that was a part of it.

Q: Because of the political aspect of the debate, was it really a surprise when he said there wouldn’t be a QE3?

A: It’s absolutely no surprise that QE3 will not happen. He was careful to use the term “tradeoff” when discussing employment versus inflation, and rising inflation (or the threat of it) is not worth any stimulus affect it might have. One of the interesting things Bernanke did was to define what he means when he says “extended period.” For him, a long-term period is typically the period over which two FOMC meetings take place, or maybe a little longer.

I was watching cable news at the conclusion of the press conference and Bill Gross said that when Bernanke stops using the term “extended period” it will signal the time at which the Fed will begin to tighten monetary policy. That’s just wrong. When he stops using the term, there will be a lag time before the Fed deliberately begins to tighten. Once he stops using that language, he won’t tighten, but he’ll continue to reinvest principle and interest, which will have a tightening affect. It’s when he stops reinvesting the principle and interest that we should watch for tightening.

Q: So what kind of a timeline are we looking at for the Fed to begin tightening?

A: We believe the end of the second quarter of 2011 will be the official end of QE2 (which is what Bernanke actually said), but he will continue to reinvest the principle and interest. He’ll stop reinvesting the interest and principle in the fourth quarter of 2011, and stop using the term “extended period” when describing the Fed’s actions at that time. We then believe the Fed will begin to raise rates early in 2012.

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