It’s an exciting week for “Fedologists” – those successors to the Kremlinologists of the Cold War, who made a living out of analysing what Soviet central planners were up to. Today’s American central planners at the Fed may not control masses of men-at-arms or have their fingers on the nuclear button, but arguably policy and personal ructions there have just as much capacity to move markets and political actors.
First came some indiscreet comments from President Obama, who noted in an interview with PBS on Monday evening that Ben Bernanke had “already stayed [as Fed chairman] a lot longer than he wanted or he was supposed to.” This taken as a clear indication that Bernanke will be leaving come the end of his current term as Chairman next year. Given a choice of departing – in all likelihood returning to academia, with generous supplemental income from various consultancy gigs for large corporations – and staying to clean up the mess that is the Fed’s balance sheet, and no prizes for guessing which looks the more appealing option. But with Hayman Capital’s prophetic chief Kyle Bass arguing that “the next 18-months in Japan will redefine the economic orthodoxy of the West”, Bernanke (orthodoxy personified) may already have left it too late.
Today also sees the conclusion of the FOMC’s two-day policy meeting, with speculation rampant that the committee will signal some form of “tapering” of its current $80bn-a-month asset purchases. Hence rising Treasury bond yields (the 10-year yield reaching a 14-month high last week at around 2.25%). Given that the great 30-year-plus bond bull market has been driven in recent years entirely by central banks and sovereign wealth funds – who are now buying each year $1.8tn of the available $2.0tn pool of AAA bonds – and we can expect more violent twitches from the patients (the world’s sick economies) in the event that the doctors (central banks) threaten to pull the plug on the morphine drips (QE).
Which is to say nothing of what will happen to equity markets – see the 20% drop in the Nikkei in the last month, the minute investors started to doubt the inflationary resolve of the Bank of Japan. So expect the Fed – misdirection and head fakes not withstanding – to continue to err on the side of large-scale money printing.