Bernanke wonders if anyone listened to his entire comment, writes Binyamin Appelbaum.
Ben Bernanke meant to deliver a couple of dollops of good news on Wednesday: the US economy was doing better, and the Fed was determined to keep it that way. The US Federal Reserve chairman announced that the Fed would extend one part of its stimulus campaign, suggested that it might extend another part, and offered details about the timing.
Yet his primary audience, the investors whose decisions spread Fed policy through the economy, responded as if the news had been grim.
The Wall Street benchmark, the S&P 500 Index, took its worst two-day dive since November 2011 - it has lost 5 per cent of its value in the past month. Wells Fargo, the largest mortgage lender in the US, has raised its advertised rate on 30-year loans.
The call-and-response underscores the complexity of the Fed's task as it seeks to do more to help the economy but not too much.
Fed officials increasingly are convinced they are finally doing enough to stimulate the economy - not just the steps already taken, but the plans they have detailed for the next several years. That is why they felt comfortable suggesting that they could begin before the end of the year to scale back their purchases of government securities. But some critics see evidence in the persistence of high unemployment and low inflation that the Fed should do even more. And many others are simply nervous.
"People aren't sure that the economy is well enough for the Fed to pull back," said Paul Christopher, chief international strategist at Wells Fargo Advisors. "The market is signalling to the Fed that we don't trust your assessment of the economy; we don't trust your assessment of inflation."
On Wednesday, Bernanke sought to underscore that the Fed still planned to stimulate the economy on a big scale over the next few years. The central bank continues to hold short-term interest rates near zero, and Bernanke said it might maintain that policy for longer than previously expected. The Fed has amassed more than $US3 trillion in Treasury securities and mortgage-backed securities, and Bernanke said it no longer intended to sell the mortgage bonds as the economy improved.
Yet public attention focused almost entirely on the least potent part of the Fed's stimulus effort, its pledge to expand its holdings of mortgage bonds and treasuries to help job growth.
Those purchases will continue for now, but Bernanke for the first time sketched a timeline for winding them down, beginning this year and ending this time next year, as long as growth keeps pace with the Fed's expectations. Specifically, he said that the Fed expected the unemployment rate to decline to 7 per cent by this time next year, from 7.6 per cent in May.
Many investors responded as if Bernanke had said only that the Fed soon intended to reduce its bond purchases.
This was a good demonstration of the difference between probably and certainly. While the timeline generally corresponded to investors' expectations, Bernanke's remarks made it official. And his repeated insistence that investors should focus instead on the evolution of economic data worked about as well as telling people not to think about purple kangaroos.
"If you draw the conclusion that I've just said that our policies, that our purchases, will end in the middle of next year, you've drawn the wrong conclusion. Because our purchases are tied to what happens in the economy," Bernanke said in one response to a question at a news conference on Wednesday.
Some analysts and economists said the reaction was particularly striking because the Fed seemed more committed than ever to its stimulus campaign.
"They are getting very close to where I would have had them be two or three years ago," said Joseph E. Gagnon, a former Fed economist and architect of the first round of asset purchases, who is now a senior fellow at the Peterson Institute for International Economics. "I find it odd, and probably the chairman is surprised and unhappy with the market reaction, too."
On Thursday the Fed declined to comment on the market reaction to Bernanke's remarks. But he expressed himself clearly during the news conference on the negative market response since his last public appearance in May. "Well, we were a little puzzled by that," he said.
He also acknowledged that the Fed might need to respond if the market's reaction persisted. "It's important to understand that our policies are economic-dependent," he said. "And in particular, if financial conditions move in a way that makes this economic scenario unlikely, for example, then that would be a reason for us to adjust our policy."
Some analysts said that would not be necessary, arguing that the market would soon settle down.
Others, however, saw legitimate reasons for concern.
The Fed has made the unemployment rate the measuring stick for its stimulus effort. It doubled down on Wednesday by saying that it would buy bonds until the rate fell to 7 per cent.
But the unemployment rate so far has fallen almost entirely because people have stopped looking for work. The share of adults with jobs, known as the employment-to-population ratio, has barely changed over the past three years.
In past recoveries, declining unemployment has encouraged people to re-enter the labour market, but some economists argue that that will not begin to happen until the rate falls well below 7 per cent.
"Why is monetary policy linked to the unemployment rate as opposed to the employment-to-population ratio?" Amir Sufi, an economist at the University of Chicago, wrote. "Seems bonkers. Does anyone seriously think the labour market is improving dramatically?"
Jan Hatzius, chief economist at Goldman Sachs, wrote that he doubted the Fed's current plans would be sufficient.
"I am much less sanguine under our forecasts for the economy," he wrote, "and to a somewhat lesser degree even under theirs."