There's a lot of debate about the effect of Fed chairman Ben Bernanke's remarks at the International Monetary Conference in Atlanta on Tuesday.
I have to differ with those who say Bernanke tanked the market.
Take a look at the S&P 500 chart here and you'll see why.
Of the 11 point drop from the day's high at 2:20pm ET, six points of it were already done before Bernanke said a word.
- Maintained view on second half turnaround.
- Insisted inflation is not a problem (read: green light for continued easy policy, if it were a problem, he'd have to alter policy).
- Concluded with the following, accommodative commentary:
"Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."
I have a hard time thinking there really was a QE expectation in the market, given what Bernanke said in April about costs and benefits of additional purchases. All our polling says it ain't there.
Bernankeis saying that those "accommodative monetary polices" will be needed as long as we get lousy job numbers like the one we got in June.
My read is he's throwing the market a bone there, not taking one way. Given that the Fed spent the entire last meeting talking about exit strategies, he's essentially saying that isn't happening anytime soon.
The debate is about what bullets the Fed has. I can tell you Bernanke thinks he has more bullets. Not sure he's communicated this. Trouble he has is that making the point will raise expectations that he'll use them. Under the right circumstances, he would.
Those circumstances would require:
- A change in his medium term forecast from an expectation of a second half rebound to one of zero growth or worse.
- A renewed concern about deflation.
He told us yesterday that neither condition has been met. He is operating under a cost/benefit framework that he laid out a year ago in Jackson Hole and advanced at the April news conference where he told us that the costs of QE3 outweighed benefits.
But that was back before the recent slowdown was so pronounced.
I have little doubt, despite the inevitable political blowback, that the Fed would do more if a consensus developed on the board that a Japanese outcome was likely. Bernanke has been clear about that.