“It is not Ben Bernanke’s job to make money for anyone,” notes John Authers in Wednesday’s Short View column. Authers reminds us that the Fed chairman’s remit is to limit inflation while safeguarding full employment — “not to bail out traders who made a bad bet”.
But there is still money to be made on the back of Bernanke’s statements. And “someone made a packet” out of Tuesday’s FOMC bulletin, notes Authers.
Look at the S&P 500 investment banks index, highly exposed to Fed policy, he says. “After opening lower, it gained 4.4 per cent by midday. Once the Fed had spoken, it dropped 3.8 per cent: and then, from there, it gained 3.1 per cent — huge gains if you picked your moments right, huge losses if you did not.”
This volatility “owed more to positioning by traders than to the message Bernanke was attempting to send”, he adds.
The salient points of Bernanke’s message, according to Authers, were: first, the Fed acknowledged that “credit conditions have become tighter for some households,” and that “the housing correction is ongoing”. This raised the downside risks to growth “somewhat”. So the Fed at least feels the market’s pain, Authers observes.
But it insisted that inflation was the “predominant” risk — so the next move in the Fed Funds rate is more likely to be up than down, he says. “Some traders took heart from the former, others were disappointed by the latter, and many more took advantage. The end result, after some very lucrative noises, left the markets where they started.”
And that, concludes Authers, “is where they should be”.
Bernanke will only bail out the markets with a rate cut if he is convinced that the credit crunch is so severe as to threaten a recession. Should he decide to do so, his own research as an academic showed that he would have more effect if he took the market by surprise. So even if he thinks a ‘rescue’ rate cut may be necessary, he had no incentive to say so now.
Rather, he will look for any sign of economic fallout from the credit crunch. And the markets will be doing the same.