Then Bernanke blinked. Financial conditions tightened as mortgage rates climbed. So, at the July 10 press conference after the NBER speech in Boston, the Chairman moved toward a very dovish stance, citing a weaker-than-forecast economy. No longer was the unemployment rate of 6.5 percent a trigger to policy—there were conditions placed on the jobless rate. But, it seemed to markets that the message was that a September tapering was still on.
The Sept. 19 no-tapering meeting surprised the markets, with only Esther George dissenting.
It is clear that the Fed is confused and the markets view our monetary authorities as a paper tiger.
If failure to present a consistent public message about tapering were evidence of confusion, then Kass would surely be right. But it's possible to look at this timeline as the Fed getting exactly what it wants out of its communications strategy.
(See also: Did the Fed just say December?)
In late spring of this year, the markets did indeed seem to be moving along lines that suggested tapering was off the table for the foreseeable future. The phrase people were using was "QE Infinity." This ran the risk that the market's bull run would become a bubble run.
Bernanke's Humphrey Hawkins answers and June press conference pulled us away from QE Infinity and deflated the bubble before it got even larger.
Did Bernanke blink next? I don't think so. Instead, it seems to me that Bernanke saw that his earlier messages had accomplished the Fed's goals: tempering the market in equities, informing the bond market that quantitative easing wasn't forever.
The dovish speech in July and the September decision not to taper may have "shocked the market" but that's because, once again, the market had over-corrected, this time from QE Infinity to Taper Now.
(See also: For the Fed, 'bubble' talk may top 'taper talk)
Instead of looking at whether Bernanke's statements are jolting the market this way or that, look at the longer-term path. That's surely the way Bernanke himself looks at it.
We may wander around like a drunken sailor, but as long as we stay on the road back to port, that's probably the best we can expect.