While Wall Street was debating exactly when the Fed would slow its quantitative-easing bond-buying program, he set out a plan to completely end the cash-generating QE in roughly one year or less. Wall Streeters were speculating about a September or fourth-quarter tapering of bond purchases.
Then the Fed chairman indicated that QE will start winding down later this year and that it will end when the unemployment rate gets to about 7 percent sometime next spring. And since Bernanke also offered a relatively upbeat economic outlook, investors began discounting an even faster end to the Fed bond-buying operation.
The idea of a 7 percent unemployment target to end QE next spring is new information, and it has completely spooked the financial markets.
After dropping about 200 points the day of the news conference, the Dow plunged 350 points the day after. Gold dropped nearly $100, and the 10-year Treasury note jumped to over 2.40 percent. That marks a near 70-basis-point year-to-date increase for the 10-year. But the rate rise has happened fast. It really began in early May, and it picked up steam after Bernanke's congressional testimony two weeks later. Then, of course, it jumped after Wednesday's news conference.
I've never been a big fan of the Fed's balance-sheet-ballooning operations. But I have acknowledged in several columns and on the air that I was completely wrong two years ago when I said its money-creating program would lead to higher inflation.
(Read More: Another Round Goes to Bernanke)
In fact, the Fed's favorite inflation indicator—the personal consumption deflator—is rising only 1 percent year-on year. On top of that, bond-market indicators of future inflation are falling. Plus, the gold crash.
You can almost make a case that the Fed is too tight, not loose. Deflation is in the air.
While the Fed's balance sheet was exploding, bank reserves were not circulating through the economy. So the M2 money supply has been growing around 7 percent, in line with its long-term trend. Meanwhile, the lack of cash circulation has pulled velocity down about 3 percent. So nominal GDP is growing around 4 percent, which is at least 1 to 2 percent too low in total spending for a real recession recovery.