I think the Fed is frustrated, and this speech by Bernanke seems to prove it.

Attached is a speech by Ben Bernanke titled "Communication and Monetary Policy" that he gave to the National Economists Club Annual Dinner on November 19th, 2013. I believe his is a VERY important speech to read and contemplate. Below are some of the things I found particularly interesting.

• I've read through this speech several times and below are some highlights, but I recommend you read it for yourself. Even though Bernanke will be leaving the Fed at the end of January, I have no doubt he still speaks for the Fed. Thus, I think it's important to try and understand and digest the messages he is delivering.
• There are two primary messages Bernanke tries to deliver in this speech. First, the Fed Funds rates will be low for a VERY long time Second, this alone should be enough to keep long rates down, thus making it ok for them to slow down and eventually exit LSAPs. Which says to me, rates will be low for ever, and we need to get the hell out of LSAPs.
• The title alone, "Communication and Monetary Policy", gives you a clue as to the case Bernanke is trying to make. He is wanting the markets to put equal if not more importance on what the Fed "communicates" to the markets, and NOT the “money” he’s inserting into markets via "monetary policy" or LSAPs (Large Scale Asset Purchases). In my opinion, you can almost sense that Bernanke is somewhat frustrated with how the markets have attached more importance to LSAP as opposed to his "forward guidance". More on this as we go.
• Page 1, "enhanced transparency is increasing the effectiveness of monetary policy." Transparency equals communication. Essentially, Bernanke is going to try and make a case that the Fed's communication of forward rate guidance "should" be more powerful than any LSAPs they do. He admits the future "can be only imperfectly foreseen" (no kidding), yet forward guidance is an essential element of monetary policy.
• Page 2, "expectations matter so much that a central bank may be able to help make policy more effective by working to shape those expectations". This argument seems completely ridiculous to me. Not only are the markets to manage their own day to day affairs AND make preparations for future demands, but they must also manage what the Fed is doing right now AND what they "think" the Fed is going to do in the future. So not only will Fed actions affect the future by their current actions, but they want you to react to what they have planned for the future. Seriously! Just get the hell out of the way and the markets to their job!
• Page 3, "it is beyond the power of the central bank to set a longer-run target for employment that is immutable or independent of the underlying structure of the economy". Again, no kidding!
• Page 4, ok! this one was VERY important!   "Currently, FOMC participants' estimates of the longer-run normal unemployment rate, as publicly reported in the quarterly Summary of Economic Projections, range from 5.2 to 6 percent." This is very important because later Bernanke will go on to explain that when he referred to 6.5% unemployment as a time they would consider policy changes, he was not defining a "trigger", but simply a "threshold". A time to start “considering” policy changes, NOT a time to start. Thus I think this mention of 5.2 to 6% shows that the FOMC wants unemployment well below 6.5% before they start to pull back on monetary policies. Thus an adjustment to forward guidance. You'll see that this essentially EXTENDS the life of zero bound rate policy well into the future!
• Page 5, "this increased transparency about the framework of policy has aided the public in forming policy expectations, reduced uncertainty, and made policy more effective." I don't think so. I think they've done nothing but inflate asset bubbles and caused markets to put future planning on hold, because they have no clue what the Fed will do next. Bernanke goes on to explain that because of this unforeseen crisis, they had to come up with NEW policy tools. Ok, so you want markets to react to your policies, yet you didn't see the last crash, AND you are now using NEW techniques. How the hell is a market supposed to operate under “new” policies to come let along current policies in place? It obviously cannot!
• Page 6, "The recoveries from most post-World War II U.S. recessions had been relatively rapid, with production, unemployment, and other key variables returning to close to normal levels within six to eight quarters." NOT THIS TIME!
• Page 7, "After the FOMC stated in December 2008 that it would likely be appropriate for the federal funds rate to remain near zero for "some time," it changed the formulation in March 2009 to "an extended period." However, such language did not convey very precisely the Committee's intentions." Well why not just say "we are going to keep rates low for a super duper unbelievably crazy long freaking time"? The message throughout his speech is an almost begging of the markets to understand that they will keep the fed funds rates lower for a VERY VERY VERY long time, going on to say that even when it looks like the economy is well on the mend, rates will still remain low long after.
• Page 8, moving from how long they were going to keep rates low, they decided to move to "so-called state-contingent guidance", and apparently this provided greater clarity. We'll see later in the speech it in fact did not.
• Page 9, this is where Bernanke explains that the unemployment rate is a "threshold" and not a "trigger". He also offers a few reasons why the "quality" of unemployment will matter also, like payroll employment, rates of hiring and separation and the big one, LABOR FORCE PARTICIPATION. If you've paid attention to my emails on this last topic you'll know that the participation rate is at a 35 year low, and falling fast! Thus the "quality" sucks!
• Page 10, Bernanke starts to talk about LSAP, and comparing that to forward guidance, to keep long term rates low. This is the beginning of his argument that the markets should put more weight on forward guidance versus LSAPs. 
• Page 11 is a MUST READ! He admits that they have much less experience with LSAP. LSAPs “have other drawbacks that include the risk of impairing the functioning of securities markets”. At least he is admitting they really have no idea what the ramifications are going to be, but there will be some.
• Page 12, "In deciding to employ LSAPs, the FOMC has accordingly remained attentive to the possible costs and risks as well as to the efficacy of this less familiar tool," 
• Page 13, "the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." Once again, they are telling us rates will be kept low for a very very long time!
• Page 14, "greater uncertainty about the costs and efficacy of LSAPs." "Moreover, to the extent that the use of LSAPs engenders additional costs and risks, one might expect the tradeoff between the efficacy and costs of this tool to become less favorable as the Federal Reserve's balance sheet expands." Bernanke starts to talk about his "intention" of "possible" tapering near the end of 2013. He even points to the fact that he said if data remained consistent the Committee would LIKELY begin measured reductions in LSAPs, yet he also said they could increase the purchase if data went bad.
• Page 15, "Financial market movements are often difficult to account for," Really! Did you really just say that out loud? This is where the astonishing HUBRIS of Ben Bernanke begins to shine through! He goes on to explain three reasons why rates "actually" went up, OTHER than the obvious reason that the largest buyer was talking about buying less. 1, the economy was improving and thus some increase was warranted. BS! 2, some institutions started to unwind levered positions, and in reality this was a good thing. That would be good thing if they delevered, problem is they levered right back up when he didn’t go through with the taper. And finally 3, it appears that the Feds forward rate guidance became less effective "after June" and the markets assumed tapering meant pulling forward the zero bound. Again, BS! The VERY moment they started LSAPs, they became more important to long term rates than forward guidance. 85 billion a month WILL have an effect on prices.
• Page 16, Ok! Check this out, this was the best part of the whole speech, "To the extent that this third factor - a perceived reduction in the Fed's commitment to meeting its objectives - contributed to the increase in yields, IT WAS NEITHER WELCOME NOR WARRANTED, in the judgment of the FOMC." ARE YOU KIDDING ME! So not only were you surprised by the markets reaction, you were offended by it as well. AND, the market's reaction was "WRONG"? Can "HUBRIS" be demonstrated any better?
• Page 16 continued, he then goes on to explain that they decided not to taper because job market metrics looked "mixed" and they were worried about the fiscal debates. BS! BS! BS! They didn't taper because rates were ramping up, and markets ALL OVER WORLD were rapidly deteriorating! THAT"S THE ONLY REASON!
• Page 16 again, it gets even better here "Although the FOMC's decision came as a surprise to some market participants, it appears to have strengthened the credibility of the Committee's forward rate guidance, in particular, following the decision, longer-term rates fell and expectations of short-term rates revived from financial market prices showed, and continue to show, a pattern more consistent with the guidance." WOW! Just when I didn't think his level hubris could climb any higher, he straps on a jet-pack and takes off. No, rates came down a bit and stabilized for now because no one in the market has a clue if and when you are going to get the hell out of the markets. You even said if things don't look as good as you want, you may raise LSAP purchases. How is anyone supposed to behave in this market. GOOD GRIEF MAN!!!!
• Page 17 and 18, rates will remain low long after LSAPs have ended, and "perhaps" well after the unemployment "threshold" is crossed.
• So there you have it! My conclusion, they are worried about the efficacy and risks of LSAPs and they want to get the hell out. Yet they DO NOT want the markets to react to this. They want you to understand what they mean by keeping rates low for an "extended period of time". It means a VERY VERY VERY long time.THUS, you Mr. Market need to keep buying long term bonds and do not let the rates go up.
• With all this said, Bernanke did not mention inflation very much. That’s because THERE IS NONE, at least not in the traditional sense. The Fed does make it clear that if inflation gets out of control, and this means "well" above 2%, not just at or slightly above it, they will stop it. But again as you may have seen in previous emails, M2 velocity, which means how effective increased money supply by fed or market is at creating GDP, is at the lowest EVER MEASURED and falling fast. This means the Feds printing has been completely ineffective at creating GDP. And thus ineffective at creating inflation. At least not in production. There of course has been inflation in asset bubbles ALL OVER THE WORLD, including US stock and bond markets.

 

I hope you read and contemplate this speech. The Fed will keep the Fed Funds rate at zero for the rest our careers. The possibility of a negative rate, which means being charged for deposits, is even being mentioned now. Something has to give. Someone needs to end the Fed's control of the world. It will not be pretty, but we must let the markets adjust on their own, or they will NEVER truly heal.

 

Randy Woodward

 

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