Ben Bernanke, the Federal Reserve chairman and former Princeton University professor, took Wall Street back to school Tuesday evening, using a dinner speech in Washington to deliver a refresher course on the Fed's modern approach to communication.
Mr. Bernanke, who is expected to return to Princeton when his time at the Fed ends in January, offered no definitive guidance on the question that most preoccupies market participants: when will the the U.S. central bank intends to trim its $85-billion-a-month bond-buying program?
The answer, Mr. Bernanke said, will depend on the evolution of economic data over the weeks and months ahead.
In September 2012, when the Fed's policy committee deployed quantitative easing for the third time, it said it would leave the policy unchanged until it was satisfied there had been a substantial change in the outlook for hiring. As Mr. Bernanke noted Tuesday, the unemployment rate since has dropped 0.8 percentage point to 7.3 per cent, as payrolls expanded by about 2.6-million positions.
Mr. Bernanke, speaking to a few hundred people who paid the National Economists Club as much as $150 to attend one of his last speeches as chairman, called the gains "meaningful." The Fed's policy committee foresees steady improvement, and if incoming data continues to support that view, policy makers "will likely begin to moderate the pace of purchases," Mr. Bernanke said.
Analysts would have preferred a more explicit reaction to October jobless figures that came in much higher than the Wall Street consensus; or the Commerce Department's initial estimate of third-quarter gross domestic product, which was one of the better readings since the financial crisis, although marred by a big increase in inventories that some economists said won't be repeated.
"Chairman Ben Bernanke offered little additional guidance on the possible timing on when the Fed might start to slow the pace of its assets purchases," Paul Ashworth, chief U.S. economist at Capital Economics, a research firm, said in a note to clients less than two hours after Mr. Bernanke's speech was published on the Fed's website.
Yet that's precisely the lesson: Mr. Bernanke is trying to get Fed watchers to focus less on reading tea leaves and focus more on data. Mr. Bernanke and others among the post-crisis generation of central bank leaders – including Stephen Poloz, Governor of the Bank of Canada, and Mark Carney, the former Canadian central bank chief who now leads the Bank of England – believe that if they are clear about the economic conditions that will prompt a shift in policy, then investors, households and executives should be able to anticipate where interest rates are headed on their own.
"Nearly eight years ago, when I began my time as chairman, one of my priorities was to make the Federal Reserve more transparent – and, in particular, to make monetary policy as transparent and open as reasonably possible," Mr. Bernanke said Tuesday.
Two decades ago, central bankers said little in public at all. Ahead of the financial crisis, former Fed chairman Alan Greenspan was so infamous for circumspection that reporters would attempt to anticipate policy by gauging how many documents Mr. Greenspan carried in his briefcase on the morning of announcements.
Mr. Bernanke started in 2012 with an inflation target, common at many major central banks, but an innovation that Mr. Greenspan had resisted. He also made clear that the Fed would attempt to meet its employment mandate by targeting what members of the policy committee judge to be the U.S.'s longer run rate of unemployment, which currently is between 5.2 per cent and 6 per cent.
Seeking ways to instill confidence in the recovery, the Mr. Bernanke and other Fed officials have sought to be even more explicit. Those attempts haven't always gone well. His attempts to bring clarity have been met with a constant grumble that Mr. Bernanke's only accomplishment is confusion.
Earlier this year, Mr. Bernanke indicated the Fed would begin to shave its bond purchases when the unemployment rate fell to 7 per cent. That guidance disappeared as policy makers began to doubt whether the unemployment rate was sending a pure signal about the strength of the economy. In September, most investors were convinced the Fed was set to begin tapering its asset purchases – and were left embarrassed and flat-footed when the policy committee voted almost unanimously to leave policy unchanged.
Mr. Bernanke addressed that episode Wednesday. In effect, he said Wall Street investors weren't paying attention. Through the summer, policy makers indicated they would curb asset purchases if indicators continued to improve. They didn't. Yet interest rates spiked in anticipation of a change in Fed policy, striking a blow to the U.S. housing market as home loans became more expensive.
"It was neither welcome nor warranted," Mr. Bernanke said of the jump in borrowing costs. Later, he said that the Fed's surprise decision to stand appears to have taught Wall Street a valuable lesson. "It appears to have strengthened the credibility of the [policy] committee's forward guidance," he said.
That will be tested in the weeks ahead. The majority of Fed watchers now predict the central bank will ease its bond buying in March. However, Mr. Ashworth of Capital Economics said December can't be ruled out. Data between then and now will settle the question.
No matter what the Fed decides to do about quantitative easing, or QE, next month, Mr. Bernanke was clear about one thing: borrowing costs will remain low for a long time yet. He took pains to separate QE from the Fed's benchmark interest rate, which is has been set at zero since the end of 2008. The Fed says it intends to leave the benchmark rate at its current setting until the unemployment rate drops to 6.5 per cent, and possibly longer.
"We are still far from where we would like to be, and consequently, it may be some time before monetary policy returns to more normal settings," Mr. Bernanke said.