Diary of a Financier

Reaction: Bernanke Inaugural Press Conference

In Idiosyncrasy on Thu 28 Apr 2011 at 07:38
  • Ben Bernanke held the Fed’s first press conference yesterday.
  • My key takeaways: Size of Fed Balance Sheet more important than the Frequency of Purchases; Inflation Expectations more important than Actual Inflation.

Two important takeaways from the Bernanke Inaugural Press Conference yesterday afternoon.  Markets rallied hard in reaction, and the media is all over it.   I haven’t heard anyone mention these important notes though…

1. Size of the Balance Sheet, not the Frequency of Purchases

The most important [and overlooked] quote comes from Mr. Bernanke’s response during the Q&A session:

Markets don’t care about the frequency of Fed purchases, they care about the size of the balance sheet. We are going to continue to reinvest maturing securities, both Treasuries and MBS, so the amount of securities that we hold will remain around constant.’

This is an interesting thesis which will be tested come June.  At that time QE2 will end and the ‘frequency of Fed purchases’ will drop to nil.  My gut reaction is that the expectation of continued purchasing drives the market higher, something idle maintenance cannot achieve.  If this market were to consolidate for too long a period, complacent traders would grow dangerously anxious.  Further, using history as a guide, I’ve noted that while bonds have reacted to action (like purchases), equities have reacted to anticipation (like the announcement of QE1’s end 3/31/10 or Mr. Bernanke’s famous Jackson Hole speech 8/21/10).

Contrary to my thinking, the market spiked when Mr. Bernanke dropped that line at 2:54p ET.  Maybe the spike is attributable to the dovish overtone throughout the speech today, but look at that spike right at 2:45p.  Coincidence?…

SPY intraday (1-minute chart)

2. Actual v. Expected Inflation

Bill Gross is the only one who caught this distinction made by Mr. Bernanke (see CNBC video @ 6:30 mark):

“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. Ultimately, if — if inflation persists or if inflation expectations begin to move, then there’s no substitute for action. We would have to respond.”

The Fed has historically resorted to data “expectations.”  It gives the Fed governors indemnity in their policy decisions, because “expectations” are subjective.  Curiously, today’s sentiment couldn’t express greater concern for inflation “expectations”–whether that sentiment is derived from media or the constituency.  Inflation I fear not… but I’m curious what data expectations the Fed’s watching.  Is there something more than mere Core Inflation?

–Romeo

Advertisements
  1. […] would generally agree.  Yet, after the uproar in the wake of Ben Bernanke’s inaugural press conference–wherein he repeatedly cited commodity inflation as “transitory” and passed […]

  2. […] look back upon the inaugural Federal Reserve press conference (April 27, 2011) as the irritant. I agreed with Ben Bernanke that inflation expectations are what matters most.  I’ve asserted that […]

  3. […] back in March 2011, when Mr. Bernanke himself mentioned the power of exploiting expectations: I agreed with Ben Bernanke that inflation expectations are what matters most. I’ve asserted that actual […]

  4. […] back in March 2011, when Mr. Bernanke himself mentioned the power of exploiting expectations: I agreed with Ben Bernanke that inflation expectations are what matters most. I’ve asserted that actual […]

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s