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Bernanke Press Conference: Translating What the Fed Says


Today Federal Reserve Chairman Ben Bernanke will take the unprecedented step of subjecting himself to a press conference following the conclusion of the Federal Open Market Committee (FOMC) meeting. This foray into monetary policy glasnost -- it is the first of what are expected to be four such press conferences each year -- is being widely anticipated as an opportunity to hear the Fed chairman expound on the famously cryptic statements issued by the FOMC.

But while Bernanke is expected to spend 45 minutes parrying with the press, his goal is to not make any news. So don't expect him to suddenly resort to blunt, plain-English explication on exactly what the Fed plans to do in the coming months.

What we're instead likely to be treated to is Bernanke hugging closely to the wording and intent of the FOMC statement that will be released about two hours before the press conference begins. If all goes as planned, you should be able to download the latest FOMC statement beginning at 12:30 p.m. EDT. The press conference then kicks off at 2:15.

Making sense of those statements, and Bernanke-speak is a sub-industry on Wall Street. Market watchers parse both looking for subtle word and tone shifts to divine what they mean for future Fed policy. Some key topics and wording to keep an ear out for:

INFLATION. While we're all paying for plenty of inflation at the gas pump and the grocery store, the Federal Reserve focuses on core inflation, which excludes both energy and food prices. And by that measure, the Fed has, to date, not had much to worry about. Remember, last year the Fed was more concerned about deflation, and it consistently noted that core inflation was "trending downward." With core inflation now rising slightly -- it is up 1.2 percent over the past 12 months -- the Fed made a subtle word-shift recently, noting in its last statement that inflation is "subdued." That moved it from way off the radar to a little closer to center. If the official FOMC statement and Bernanke use a different modifier than "subdued," that would be an acknowledgment that the Fed sees core inflation as a growing concern.

And to be clear, while core inflation is the Fed's central focus, it is not blind to what is going on with oil and food prices. Its stance to date has been that the rise in commodity prices is "transitory." But in Congressional testimony in March, Bernanke noted:

"....sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability."

In the seven weeks since that pronouncement, oil prices have increased another 10 percent. It will be interesting to see if there are any Fed hints today as to whether it is any more concerned that "transitory" may be sliding into "sustained."

THE FATE OF QE2. Back in November, the Federal Reserve launched phase two of its "quantitative easing" program with the intent of stimulating the economy by spending up to $600 billion to buy up long-term government bonds. The program is scheduled to end by June 30th, and the conventional wisdom now is that the Fed will indeed pull its ventilator from the economy now that the patient seems to be recovered. In a March trip up to Capitol Hill for a round of Congressional testimony, Bernanke noted "...we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold." Self-sustaining is the key phrase here. If we hear more talk along those lines, it's likely QE2 will indeed end on or before its June 30 deadline, and that there won't be a QE3 around the corner.

The fact that the Fed is also releasing its latest economic forecast along with the FOMC statement will provide key insight on just how solid it deems the economic recovery to be. In the past, its economic forecast was released three weeks after the FOMC statement. Having both hit the wires at the same time should make for some interesting back-and-forth at the press conference.

THE BEGINNING OF FED TIGHTENING? Separate from the QE2 stimulus is the fact that the Federal Reserve has kept its Fed Funds rate hovering between zero and 0.25 percent as yet another way to nudge business and consumers to invest rather than save. Ever since the Fed went into serious accommodative mode as the financial crisis took hold, it has stated that it expects to maintain low interest rates for an "extended period," and the expectation is that this phrase will be used again today. But there will no doubt be plenty of questions about what exactly the timeline for "extended" is, especially given that in recent months, Bernanke has begun to hear a growing chorus within his own FOMC that rising inflation may merit ratcheting up interest rates as soon as year-end. But even if "extended" were to end sooner than later, that doesn't mean short-term interest rates will go up, as the Fed is considering an alternative strategy that would instead raise the rate it pays on bank reserves. If that's how it plays out, it could indeed be a long time before bank savings rates start to rise appreciably. That makes it all the smarter to take up Allan Roth's advice on how to earn the highest yield on your cash in this parsimonious rate environment.


JOBS. The Fed has two broad mandates: foster price stability (i.e. keep inflation in check) and maximize full employment. The standard definition of full employment translates to an unemployment rate of around 5 percent. Right now we're at 8.8 percent. Yet it's not clear what if anything the Fed can or wants to do to address high unemployment. In the extended notes to the last FOMC meeting in January (released March 15th), all that was said is that there is divided opinion within the Fed on whether its monetary policy levers can effectively be used to bring down the unemployment rate:

"Some participants stressed that certain determinants of the unemployment rate, such as mismatches in the labor market and firms' hiring practices, were both difficult to measure in real time and not directly affected by monetary policy. Others emphasized that in the current situation, monetary policy could still play an important role in reducing unemployment."

Hopefully Bernanke will be pushed to clarify exactly what, if any, policy initiatives the Fed might consider to address "maximum employment."

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