Words Matter
After the so-called Great Recession of 2008, the Federal Reserve (Fed) began buying up large quantities of bonds and other securities. This policy of quantitative easing (QE), as it became known, was part of the “pump priming” effort by the government to increase liquidity and stabilize the financial system in order to get the economy growing again. By 2013 things had been improving sufficiently for the Fed to consider slowing down its QE program to avoid triggering inflation. In April of that year Ben Bernanke, the Fed chairman, announced that the Fed was considering tapering off its level of bond purchasing starting the following year. To be clear, he was not talking about stopping QE; he was merely explaining that the volume would be reduced. And not for at least a year.
The result was immediate panic in the bond markets. In one week the yields on treasury bonds spiked by 75 basis points (0.75%), the most rapid increase in market-driven bond yields ever seen. That event has come to be known as the Taper Tantrum of 2013.
Fast forward to 2022. Having been slow to react to inflationary trends that began in 2021, the Fed started raising rates in significant amounts and at a significant pace. It’s difficult to say whether or not the Fed’s actions were the primary driver of the stock market’s decline since then, but there’s no question that this aggressive Fed policy has been the key factor behind the abysmal performance of bonds this year.
But it seems that wasn’t enough. At the most recent Fed Open Market Committee (FOMC) meeting, chairman Jay Powell made the unprecedented claim that (my paraphrasing) they were going to go to such lengths to stop inflation that the stock market and job growth would likely collapse through the process. The outcome of that speech was another 500 basis point (5%) dive in the S&P 500. And he made his statements without even waiting to determine whether or not the huge increases so far in the Fed funds rate are working and sufficient.
It’s not surprising that the Fed constantly acts too slowly when it comes to managing inflation or job growth (its two primary mandates). Recessions and protracted inflation are very difficult to predict. But Powell should certainly have known better that to throw gasoline on the fire with such incendiary proclamations. After what happened in 2013 it should be obvious to any Fed governor that any speech they make will have repercussions.
Many economists have been excoriating the Fed and Powell for their poor performance. Jeremy Siegel, a finance professor at the University of Pennsylvania, asserts that Powell is not only talking too tough, but also that real (above inflation) prices are already coming down. If Siegel is right, that would suggest that the Fed would do better by pausing its anti-inflation crusade right now rather than doubling down.
I’m not an economist and don’t know how far the Fed should go. But I do know what they should and shouldn’t say. Words matter.