Did Bernanke Make You Freak? Why Words Matter.

By Paul Lombino 

Sometimes you can’t win for succeeding.

World profitsWhen Federal Reserve chairman Ben Bernanke announced June 19 that the U.S. economy may be performing well enough to eventually stand on its own two feet, the collective market super freaked. On that Wednesday, the central bank chief gave investors an early heads-up that the Fed was considering may-beeeee later this year that it would begin to slow its quantitative easing policy. You know, QE, where the government buys bonds to keep interest rates low to help goose economic activity.

As if Bernanke’s statement were some bolt from the blue, the Dow Jones Industrial Average reacted by shedding some 200 points that day and 353 points the next day, the index’s worst one-day downturn since November 2011. I realize investors sold off for a variety of reasons, including profit taking and fears that China’s economy may be on shaky ground. But it didn’t help that a number of business pundits rushed to declare that Bernanke was “taking his foot off the accelerator.” Horrors. And wrong.

Choosing Words Carefully

When it comes to interpreting the intentions of influential people like the Fed chairman whose remarks can generate ripples beyond the U.S. market, it’s important to understand first and then choose words carefully. Saying that Bernanke was “weighing conditions to gradually ease off the stimulus pedal at some point in the future” would have been more accurate and, perhaps, may have tempered the knee-jerk reaction by jittery investors.

Removing the euphemistic punch bowl has been part of the Fed’s policy objective since the dark financial days of 2009. So keep in mind that when ─ not if ─ America’s central bank decides to bump up rates ─ possibly this fall, maybe 2014 ─ to help balance economic growth and inflation, take a deep breath. The U.S. economic system is just that, a system. One that needs to be tweaked here and there to keep it running at a reasonable pace ─ ideally not too fast, not too slow.

Getting it just right will be no simple task. But higher interest rates down the road will be a signal that our economy is healing. And that’s a good thing. Isn’t it?

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3 Comments

Filed under Word Selection

3 responses to “Did Bernanke Make You Freak? Why Words Matter.

  1. Paul — As a journalist and investment analyst, I enjoyed your astute observations about the latest overreaction to Ben Bernanke’s comments.

    Ordinarily, it would be good news when the nation’s central banker declares that the economy is on the mend. Typically in the past, markets cheered when the Fed made sanguine announcements over the economy. But by immediately tanking in the wake of Bernanke’s comments, the markets acknowledged just how dependent this fragile recovery has become on ultra-low interest rates. Hence, the paradox in today’s markets.

    The Fed’s stated intention is to gradually reduce its monthly purchases of Treasury and mortgage-backed issues starting later this year, then end the buying program when the unemployment rate hits 7 percent. The Fed expects this goal to be reached by mid-2014.

    That’s a very modest goal — perhaps too modest. Our policymakers need to put less focus on unnecessary budgetary austerity and more on ways to stimulate the economy. If it weren’t for budget “sequestration,” the US economy would be growing at an even faster pace. Fears over the deficit and potential inflation are unwarranted and ideologically driven.

    Regardless, investors — and the public — largely have the Federal Reserve to thank for improving economic conditions. And even when the punch bowl is finally removed from the party, it won’t be until the latter part of the year, at the earliest. Meanwhile, corporate earnings and balance sheets remain strong and consumers are spending again. If anything, this recent market sell-off is a contrarian buying opportunity.

  2. Alisa Wolf

    Great discussion. I agree with you about the power of words Paul, I think the market would probably have reacted the way it did no matter how carefully Bernake spoke. Thanks to John for articulating why that may be so. Alisa

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