One expects and values honesty and forthrightness from the Chairman of the Federal Reserve. So when Ben Bernanke told the US Senate Committee on Banking, Housing and Urban Affairs, in the course of his semi-annual presentation to them, that the outlook for the US economy remained “unusually uncertain” and that the risks were all to the downside, he should have been applauded for not sugaring the pill and for telling it to the Senators like he sees it.
However, that is not the way markets work. Before his speech, Wall Street bloggers were counting down the minutes to his opening remarks, looking eagerly for some positive uplift to add fresh impetus to what had been a good day and a half, with stocks until that point making across-the-board gains. As soon as the markets grasped the mile high overview of the US economy being painted by Helicopter Ben they kicked off a minor selling frenzy and the markets in the US and Europe tanked.
To a dispassionate observer this probably illustrates nothing so much as the inherent skittishness of markets. Bernanke had said nothing that anyone with half an eye to the markets did not already know. The fact that he had a number of positive points to make was simply seed cast on stony ground. For example, he pointed out that the state of the US banking system had improved significantly since the worst of the crisis, with loss rates on most types of loans now topping out, and bank capital ratios improving all the time. But then he flagged up the weakness in bank lending, with bank loans outstanding continuing to contract, causing severe problems for small businesses in many States.
What a difference a day makes though in the world of the markets. By the morning of the next day it was as if Bernanke had not spoken. In the UK shares soared despite Wall Street’s gloom, on the back of better than expected retail sales numbers for June. When the US markets opened a number of major blue chips reported good results, with UPS and AT&T leading the charge. By lunch time Wall Street had seemingly forgotten the Fed even had a chairman and stocks were roaring off once more.
Day traders and spread betters who love volatility will have been in their seventh Heaven with all this pointless peaking and troughing of the stock charts. Shrewd dealers would have been picking up bargains here and there and taking profits as the occasion arose, but what has this to do with the real economy? Around the same time as Bernanke was giving his gloomy presentation (seven percent unemployment at least through to 2012, oh dear), the ratings agency Fitch was publishing the results of its survey of senior US fixed income professionals [registration required]. Fitch’s headline: “Senior Fixed Income Investors Steady on US Credit Recovery,” had a much more positive story to tell – a pity the markets were not listening to a bit of good news from a ratings agency for a change.
Further reading on the Federal Reserve and recovery prospects
- Why Printing Money Sometimes Works for Central Banks, by Paul Kasriel
- Trust, Fear, and a Dead Economist, by Todd Buchholz
- Bringing Trust Back to Wall Street, by Bill Hambrecht
Tags: Ben Bernanke , credit rating agencies , economic recovery , Federal Reserve , Fitch , stocks and shares , US