What Bernanke Really Said, Or How The Chairman Just Lost Control Over Policy Again

From Mike O'Rourke of Jones Trading

Fed Put Reiterated, Credibility Gone Again

Overall, it was a quiet trading day until the 2 pm release of the June 19th FOMC minutes. The release prompted instantaneous sharp moves in several assets that quickly reversed. June 19th was a press conference meeting. Could anyone really divine anything from 6 week old minutes considering the Chairman clearly shared the FOMC view that day? Nonetheless, the day’s real fireworks occurred after hours as the Chairman’s Q&A comments at a speaking engagement sent the Dollar crashing and risk assets (Gold, Oil, Bonds and Equities) flying. Yes, Bonds are a "risk asset" these days.

Having watched the press conference, we think nothing notably new was said to indicate a policy shift. When asked about the policy outlook, the Chairman said, “I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy.” This is not new considering the Fed has promised to keep rates low until 2015 and the Fed has repeatedly stated that reduced asset purchases equates to additional easing. Most of the Fed Chairman’s remarks were consistent with the statements he made at the press conference.

The Chairman’s statement that caught our attention and that we could see exciting markets was "And I guess the final thing I would say in terms of risks of course is that we have seen some tightening of financial conditions, and that if, as I've said and as I said in my press conference and other places that if financial conditions were to tighten to the extent that they jeopardize the achievement of our inflation and employment objectives then we would have to push back against that." There is nothing like a clear affirmation of the “Fed Put” to create another round of risk taking and aggressive behavior in the markets. The simplistic interpretation is that the Fed will never take away the accommodation, because the central bank cannot let markets “tighten,” which is a euphemism for go down.

In a simple stroke, the Fed Chairman has undone the work of his communications of last month. The credibility that began to emerge from the June 19th press conference is gone. There is a large segment in the investment community that believes the Chairman cannot exit this policy, and his statement about not letting markets tighten only strengthens their case. The Chairman has returned the markets to the point where he has lost control of monetary policy, again.

Early in the Q&A when asked whether, with the benefit of hindsight, he would have done the press conference differently he answered no. He was willing to stem the risk taking behavior to avoid a larger problem in the future. "…where we don't provide any information -- it's very likely that more highly levered, risk-taking positions might build up, reflecting, again, some expectation of an infinite -- infinite Asset Purchase Program." In addition, he continued to refer to QE as a policy tool in temporary terms - "The first asset purchases, we have thought about, and I have frequently described as, providing some near-term momentum to the economy … We've made progress on that, but we still have further to go. But again, that's the objective of the asset purchases is to provide near-term momentum to try to get the economy moving forward more quickly." Despite having said he was glad the press conference had the result of reducing risk taking and referring to QE in short terms, the market only heard the Fed Put. Thus, the Chairman has reiterated the “Tepper Trade.”

We don’t believe the Chairman’s intentions have changed. Regardless, the Chairman’s credibility is once again damaged. If the Dollar breakdown continues, it will be a sign that the market believes the Chairman has again lost control over policy. The asset clearly in the best position in such an environment is Gold. After such a notable correction in the past 9 months, the precious metal once again becomes a very attractive global asset if monetary policy in the largest economy of the world spins out of control.