The Bank of England kept Deputy Governor Paul Tucker’s departure plans closely under wraps this week, like it does with most of its communications with the outside world. The Old Lady of Threadneedle Street does not blab.
That is not the case with the United States Federal Reserve.
There, the senior central bankers who set such globally important policies as quantitative easing and interest rates like to guide the market with quiet words and nudges.
Increasingly, they seem to use one man to receive and pass on such messages – the Wall Street Journal’s televisual chief economics correspondent, Jon Hilsenrath.
If the financial markets seem to be barking up the wrong tree in their guesswork on what the Fed’s next move is going to be, it is with Mr Hilsenrath that the bankers have a quiet word.
As one starry-eyed TV anchorwoman gushed to him on CNBC the other day: “Tell me, Jon, what did Ben Bernanke have for dinner last night?”
His ability to read the central bank’s mind is such that he is known among many investors as The Fed Whisperer. And, because of the unerring accuracy of his reports on Fed thinking, his columns move markets like no other.
This week was no different, as the markets had what some wags dubbed a “Hilsenrally” following a piece he wrote saying the Fed wanted to dampen speculation of a rapid pullback on its $85bn (£54bn)-a-month bond-buying programme.
As he put it: “An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly, it won’t mean that the Fed is anywhere near raising short-term interest rates.”
That may seem fairly anodyne – indeed, as one senior rival journalist told me sniffily from Wall Street: “There’s nothing there that isn’t a statement of the bleedin’ obvious. Hilsenrath’s all about the mythology, not the reality.”
Unfortunately, the markets don’t bear that out. You see, if there is one thing investors and economists across the world talk about these days other than when the Fed will rein in its QE bond-buying programme, it is when interest rates will start to rise again. And when Mr Hilsenrath said it ain’t happening any time soon, that changed millions of trading gambles across the world.
Bond yields, the interest rate paid on debt by governments and companies, have risen rapidly in the past month or so amid speculation that the era of super-cheap US lending could be coming to an end.
Take the biggest global benchmark – the 10-year US government treasury bond. It has moved from 1.63 per cent in May to 2.3 per cent on Wednesday. Mr Hilsenrath’s article took it back down to around 2.12 per cent last night.
These moves may not look so massive – fractions of 1 per cent at a time. But you have to remember that US treasuries are traded in packets of tens and hundreds of millions of dollars at a time. A change of a quarter of a per cent suddenly becomes a serious proposition. More significantly, they impact on the price at which governments, for which read “taxpayers”, borrow when they issue new debt, as they do all the time.
Just like homeowners have got used to super-low interest rates, so have grossly indebted western governments.
Years of historically low returns on traditional bond markets have led to some crazily low interest rates for countries in the third world, too. Investors have turned a blind eye to the risks involved and lent out to countries like Mongolia and Rwanda for 5, 6, 7 per cent.
This clearly cannot last as we enter a new recovery phase from the financial crisis.
The markets know this more than anybody; hence the upwards movement of bond yields.
A return to more normal borrowing rates is a crucial by-product of the improving global economy. But it has to happen smoothly to prevent chaos in the many countries already struggling to finance their profligate spending of previous years. This is extremely tricky to achieve in modern financial markets. Markets are volatile beasts at the best of times, run by binary-minded folks: you buy, or you sell. Volatility is baked into the system.
Nowadays, tough new regulations on capital buffers for banks mean they are unwilling to act as loans warehouses – the vital middleman role that smoothes out price volatility.
So good, and regular, communication with the markets will be key.
Fed governor Ben Bernanke and his team will need to use the subtle services of the Fed Whisperer more than ever in the coming months.
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- Ben Bernanke
- Debt Market (bond Market)
- Federal Reserve
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