Bernanke Uses New Formula For Pleasing Investors
In his final performance, Ben Bernanke rewrote the script.
Investors had been on edge for months about when the Federal Reserve might slow its economic stimulus. A pullback in the Fed's bond purchases, they feared, could jack up interest rates and whack stocks. Bernanke's mere mention of the possibility in June had sent stocks tumbling.
So on Wednesday, Bernanke showed something he'd learned from leading the Fed and addressing the public for eight years: Tough news goes down best when it's mixed with a little sweetener.
At his last news conference as chairman, he explained that the Fed would trim its monthly bond purchases by $10 billion to $75 billion—a prospect that had worried the markets.
Yet Bernanke also calmed nerves by walking back a plan to consider raising short-term rates once unemployment reaches 6.5 percent from the current 7 percent.
That 6.5 percent threshold the Fed had been using? Not much of a threshold anymore. The Fed now says it expects to keep its key short-term rate near zero "well past" the time that unemployment falls below 6.5 percent.
The message: The Fed expects low-cost loans to boost the economy for, well, for a very long time.
Investors rejoiced by sending the Dow Jones industrial average rocketing nearly 300 points to a record high.
It means that five years after the Fed responded to the financial crisis by cutting its key short-term rate to near zero, it has no plans to change course. Low rates encourage spending, hiring and investing. At the same time, critics say it can inflate dangerous bubbles in stocks, housing and other assets.
Bernanke's remarks suggested that three factors had led him to the balance he struck Wednesday: The unemployment rate can be misleading. The Fed wants to avoid setting unrealistic expectations. And inflation remains so low that it poses a potential problem for the economy.