“…there seem to be two Ben Bernankes out there, and, presumably, both would profess to tell the truth. The think-tank scholar (at the Brookings Institution) last week wrote that long-term interest rates were not set by central-bank policies but by fundamental factors, notably inflation and real interest rates, which are a function of economic growth. In contrast, in November 2010, the then Fed chairman wrote a Washington Post op-ed article to explain why the central bank was buying hundreds of billions of dollars of government securities. The answer, according to his defense of the central bank’s policy moves, was to lower long-term interest rates…
…At this point, Bud Collyer, the bow-tied emcee of To Tell the Truth, would exclaim, “Will the real Ben Bernanke, please, stand up!” Is it the Bernanke who now insists that central banks have no influence over long-term interest rates? Or the other guy, who argued four-plus years ago that the Fed was undertaking unconventional policies in order to drive down long-term rates?”, “The Two Faces of Ben Bernanke”, Randall W. Forsyth, Barrons, April 2015
Up and Down Wall Street
The Two Faces of Ben Bernanke
Suddenly, ex-Fed boss sees fundamentals, not central bank policies, dictating long-term interest rates.
To Tell the Truth. That was the title of a TV quiz show that baby boomers and their parents might remember from the 1950s and ’60s. As on similar shows, such as What’s My Line and I’ve Got a Secret, celebrities would play contrived parlor games guessing something about the contestant’s identity or some other attribute.
Viewers could pretend they were part of the salon of this seemingly smart set of B-list celebs. That placed the shows apart from the more typical contests that involved the eternal desire to hit some sort of jackpot by guessing the name of a tune, the price of a product, or the answer to some trivia question. This was what passed for reality TV at the time, even though much of what was presented was phony.
Lying was the basis of To Tell the Truth. Three individuals would assert forthrightly that he or she was a certain person, and the panelists would have to guess who was the real deal. The more convincing the imposters were, the more they won by duping the panelists. There were no doppelgängers, just folks who could plausibly pass for the authentic person.
If the game show were revived, the first contestant could be Ben Bernanke. But it would be an unfair contest because there seem to be two Ben Bernankes out there, and, presumably, both would profess to tell the truth.
One of them last week started a blog in his current position of distinguished fellow in residence, economic studies, at the Brookings Institution. Another used to be the chairman of the Federal Reserve Board. Yet, those two Ben Bernankes seem to be at odds with each other.
The think-tank scholar last week wrote that long-term interest rates were not set by central-bank policies but by fundamental factors, notably inflation and real interest rates, which are a function of economic growth.
In contrast, in November 2010, the then Fed chairman wrote a Washington Post op-ed article to explain why the central bank was buying hundreds of billions of dollars of government securities. The answer, according to his defense of the central bank’s policy moves, was to lower long-term interest rates.
At this point, Bud Collyer, the bow-tied emcee of To Tell the Truth, would exclaim, “Will the real Ben Bernanke, please, stand up!”
Is it the Bernanke who now insists that central banks have no influence over long-term interest rates? Or the other guy, who argued four-plus years ago that the Fed was undertaking unconventional policies in order to drive down long-term rates?
In his initial Brookings blog post last week, Bernanke wrote, “If you asked the person in the street, ‘Why are interest rates so low?’ he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate.
“But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate),” he continued. “The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited.
“Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed,” Bernanke concluded. He made no mention in the blog of quantitative easing, the large-scale purchase of intermediate- and long-term Treasury and mortgage-backed securities. The express aim of QE is to lower longer-term interest rates—especially real rates—when short-term rates (which the Fed normally sets as its main policy tool) already are at or near zero.
In his Washington Post op-ed, Bernanke explained the central bank’s decision to undertake a second round of securities purchases, dubbed QE2. The first buy of more than $1 trillion had “helped reduce longer-term interest rates, such as those for mortgages and corporate bonds.”
Moreover, the expectation of QE2 already had been felt in the easing of financial conditions. “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action,” he wrote.
In other words, it would appear that Bernanke, the Fed chairman, was taking credit for lowering long-term interest rates in 2010—something that Bernanke, the academic, contends in 2015 that the central bank cannot do.
The latter argument is all the more curious, given that other central banks are engaged in their own QE schemes. The European Central Bank is buying 60 billion euros ($65.88 billion) of European government bonds per month. Those purchases have driven their yields down to levels never seen in the history of lending, going back to the Medicis.
The yield on the 10-year German Bund ended the holiday-shortened week at 0.19%—down by nearly a half (17 basis points or hundredths of a percentage point) in the past month. Moreover, with the Bank of Japan’s QE a cornerstone of Abenomics, more than $5 trillion of debt securities worldwide now have negative yields, according to a Bank of America Merrill Lynch estimate. That stunning factoid reflects the decision of central banks in Europe to set policy rates below zero, as well as massive QE—two actions previously beyond central bankers’ imaginations.
Bernanke’s protestations notwithstanding, other observers contend that the role and influence of central banks have expanded far beyond the textbook description. Speaking at a media lunch last week, Dan Fuss, Loomis Sayles vice chairman and co-manager of its flagship Loomis Sayles Bond fund (ticker: LSBRX), said that another objective has been added to central banks’ remit. In addition to the traditional ones of safeguarding the banking system, controlling inflation, and fostering economic growth, international roles now loom large for all major central banks.
“Central banks have been cornered by geopolitics,” he said, in what he described as an increasingly tense world. While Fuss asserted that it’s “about time” for the Fed, for domestic reasons, to lift its federal-funds rate target from the near-zero that has prevailed since the depths of the financial crisis in December 2008, he added that such a U.S. move would make “no sense at all” for much of Asia.
Higher U.S. rates would further lift the dollar and hurt other currencies, causing severe problems for those countries, he explained. While Southeast Asian lands have taken steps to lessen their vulnerability to hot-money flows, like those seen during the region’s crisis in 1997-98, they still are subject to sudden outflows. And those money movements don’t just have financial repercussions, but can also lead to “breakdowns in societies,” as economies tumble and prices of imports soar, as often happens in currency crises.
For such reasons, Fuss used to be reticent when visiting the Boston Fed in expressing his view that a “dotted line ran from the State Department to the Fed.” No more; now he says there is a solid line between the two. Economic crises could only make a perilous geopolitical situation that much worse.
In a world in which central bankers try to manipulate or at least affect financial variables, from currencies to bond yields to stock markets, in order to promote prosperity and maintain what passes for peace these days, it’s a bit strange for a former central banker to profess his cohorts’ impotence in influencing anything but the cost of short-term money. But to tell the truth apparently is just for game shows.
FUSS ALSO OBSERVED AT midweek that the Boston Fed has economists who can come up with numbers to show why employment isn’t as strong as it seems, “giving the central bank a legitimate out” from raising rates anytime soon. No need for that now, given the punk jobs figures for March, released while most of Wall Street was off for Good Friday.
Nonfarm payrolls increased by just 126,000 last month, far short of forecasts of another 235,000 rise, and after downward revisions in the two preceding months totaling 69,000. The unemployment rate, which comes from a separate survey of households, was steady at 5.5%, in part because of a small dip in the labor force. Average hourly earnings rose 0.3% last month, leaving wages roughly in a dead heat with inflation at 2.1% over the past year, notwithstanding the widely publicized raises for low-paying jobs at McDonald’s MCD -0.6483321133535501% McDonald’s Corp. U.S.: NYSE USD95.01 -0.62 -0.6483321133535501% /Date(1429292833050-0500)/ Volume (Delayed 15m) : 2844269 P/E Ratio 19.5979381443299 Market Cap 91721313729.8147 Dividend Yield 3.5770647027880065% Rev. per Employee 65336.4 More quote details and news » MCD in Your Value Your Change Short position (MCD).
The subpar payroll performance “was not weather related,” write Philippa Dunne and Doug Henwood of the Liscio Report. Some 182,000 people reported they couldn’t get to work because of the weather, in line with historical standards for March. But, adds David Rosenberg, chief economist and strategist at Gluskin Sheff, the dollar’s impact “was all over this report,” just as with the weaker-than-expected jobs tally of 189,000 by ADP.
All of which pushes back expectations for the first Fed rate hike. “June vacation plans just got a little safer,” quips Michael Feroli, JPMorgan’s Fed watcher. September would then seem to be the next possible time for the first increase. But the fed-funds futures market was pricing in a rate of only 0.34% for December—roughly half of the level of the Federal Open Market Committee’s median projection of 0.625% in its “dot plot” chart.
Looking ahead to baseball’s opening day, Cliff Corso, chief investment officer at Cutwater Asset Management, thinks that fears of rising interest rates, the impact of the strong dollar, and margin pressures from labor winning a greater share of profits, could be a “three-fingered knuckle ball” for the stock market. After a flat first quarter, the pitches aren’t going to get easier once earnings season starts this week.