John Hilsenrath of the Wall Street Journal says that investors overreacted to Ben Bernanke’s suggestion last week that the Fed might taper off its QE program in the near future:
One problem the Fed now faces is that in signaling its plans for the so-called quantitative-easing program, Mr. Bernanke might have led investors to believe the central bank is going to rein in all of its easy-money policies sooner or more aggressively than it actually expects.
The Fed isn’t just buying bonds; it also has long held short-term interest rates close to zero, and has said since December it will keep its benchmark federal-funds rate there until the jobless rate falls to at least 6.5%. Mr. Bernanke likens the two levers to driving a car: When it reduces its bond purchases, that will be like lightening the pressure on the accelerator; when it starts raising rates, it will be akin to tapping the brake.
Many investors appear to have missed Mr. Bernanke’s signals that the Fed might wait longer than expected before raising short-term rates. He said on Wednesday that the 6.5% unemployment rate threshold might be too high and that the Fed might decide to keep rates low for long after the rate drops below that level, especially if inflation remains low.
Hmmm. So QE might end soon, but interest rates might stay at zero longer than expected. So why the panic?
My cynical response would be that markets just like to panic. It’s what they do, and they’re more panic-prone than ever these days. Partly this is because the economy is genuinely weak. Partly it’s because Fed actions are more important right now than they usually are. Partly it’s because Wall Street has gotten too accustomed to making money on model-based investing that relies on tiny spreads. Even a hint of a change in those spreads is now enough to send them screaming for the hills.
In any case, I expect the panic to subside soon—though outside events in China and Europe could obviously change that. But if either China or Europe go splat, a few words from Ben Bernanke aren’t going to matter anyway.