One clings to the hope that Chairman Ben Bernanke and his colleagues at the US Federal Reserve are some of the brightest economists in the world today and hence they know what they are doing because, be in no doubt, they have embarked on an ambitious journey, during which they intend to simultaneously burst bubbles, avoid a bond market rout, and maybe even at the same time encourage banks to use their cash to lend to people and businesses by making government bonds less attractive.
To achieve all of the above at the same time without causing excessive market volatility will indeed be an enormously difficult task. As Andrew Haldane, the Bank of England’s Executive Director for Financial Stability, recently observed rather pointedly, “we have intentionally blown the biggest government bond bubble in history”.
Surely recent “Fedspeak”, including Bernanke’s bombshell comment that Quantitative Easing, (QE), may be tapered “within the next few meetings” can’t just have been “careless talk”. Given the quite extreme effect on US Treasury bond yields, (the 10-year yield climbed by 0.60 per cent in only five weeks), one can be quite certain that by now the Fed would have embarked on a coordinated program intended to correct market perceptions, if the Fed was unhappy with same. This has not happened, but there is just a chance that they take the opportunity next Wednesday at the regular meeting of their monetary policy committee, the FOMC, to do just this. However, I don’t expect this to be the case.
I feel that a large contingent at the Fed has become concerned that bubbles of the kind that brought the financial system to the brink of collapse in 2008 were re-forming and they needed to tackle this sooner rather than later.
The multiple and diverse incidental consequences of their change in rhetoric are plain to see. Credit spreads have widened, emerging markets and currencies have tumbled, and fear rather than greed has the upper hand. Most frustratingly for the Fed’s counterparts at the Bank of Japan, the Yen has strengthened, as its safe-haven status has trumped even their massive quantitative easing and this in turn has caused the Nikkei stock index to collapse.
I’m sure the Fed is watching these developments very closely, but I don’t believe they will be easily deviated from their path, as they fear delay will have far more serious consequences.
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