FED Chairman Ben Bernanke steered a steady course as he was questioned by the House of Representatives today. The release of the chairman’s prepared testimony 90 minutes early was a benefit as the markets had time to actually read the substance of the address and not just react to the ALGO-DRIVEN HEADLINES. Even with the extra time to read the release some talking heads still failed to understand the chairman’s efforts to remain balanced. I do agree with Mohamed El-Erian that the tone of the prepared statement was “dovish” and Bernanke wanted to appear very concerned about the lack of growth in the jobs market.
In his economic outlook Bernanke states: “Despite these gains, the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment are still much too high.” Further, he adds, “… with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”
These two references are certainly dovish in scope. The BONDS and STOCKS rallied on the softer tone but the U.S. DOLLAR rallied and the precious metals sold off with the DOLLAR strength. The dollar action was an enigma to the risk-on/risk-off crowd, but the negative news may be a greater factor going forward. One day is not a trend but it is something to be attentive to. Also, as the EURO was sold some of the emerging market currencies finally found a BID. Again, it may be a one-off event.
In what may have been the most important piece of Bernanke’s prepared text was this: “… even after purchases end, the Federal Reserve will be holding its stock of Treasury and agency securities off the market and reinvesting proceeds from maturing securities, which will continue to put downward pressure on longer term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” This is the most significant piece of FED policy going forward–far more important than tapering–WHAT WILL THE FED DO TO SLOW THE VELOCITY OF $3.5 TRILLION OF RESERVE IN THE SYSTEM? Tomorrow I will discuss (again) the possible role of macroprudential regulation in the FED‘s toolbox.
***I am reposting a letter to the Financial Times I wrote in August 2002 as a way to establish my credibility in the upcoming discussion of Glass-Steagall and the enhanced role of macroprudential regulation.
Sir, John Plender (“How banks got in a mix”, August 21) correctly identifies the systemic dangers that accompanied the passage of the Graham-Leach-Bliley act. The repeal of Glass-Steagall has pushed the US banking system to the brink of “moral hazard”. The conglomeration of all financial services under one roof has entangled banks in numerous ethical conflicts. Additionally, Graham-Leach-Bliley has made several institutions so large that the Fed cannot allow them to fail.
A single institution’s deep involvement in every facet of financial dealings does not create greater synergy but greater risk. These large, private profit centres know they are too big to collapse. This realisation adds great uncertainty to the entire financial landscape. Rewarding private profits while socialising the risk is a pathway to disaster. Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.