If you closed you eyes and pretended to be her…what would you see and feel?
Speaking personally, I would be intimidated. Here you are, on a podium in front of these very bright reporters. She was in a bit of a shark cage, with sharks swirling around her looking to somehow get a piece of her misquote. In this regard, she did better than Ben Bernanke. You may recall that he didn’t exactly inspire oratory confidence until some time into his first year. Our new Fed Chair handled her opening battle – and these are very much a battles – quite well.
Her remarks and comments brought me back to a time when following Federal Reserve language was a full-time job. In the early 1980’s, I can still recall the grammatical torture we put the Chair’s comments through. We could publish almost anything we wanted, and the language made it almost impossible to refute our views. It was a time of oratorical fog.
Our belief is that we are back to those days again. These were the days of the magic of the Fed, when the public saw them as oracles of Delphi. The skill of the deliverer was much of what mattered, as shown by the Fed under Greenspan.
Consider that as an investor, if you knew that clarity would be lower from the person controlling the price of your inventory (such as a line of credit), wouldn’t you buy a little insurance? Maybe take some money off the table just to be careful? You would expect volatility of prices to increase due to greater uncertainty. The fall in prices today was a rational response.
Her next appearance will give us a better idea of how well she can work in this fog. Can she protect the Fed and maximize her room to maneuver? Will the reporters be as polite and continue to feed her those easy questions next time?
While the Treasury market was weak today, the focus should be on the entities that live and die based on estimating bond volatility, such as Fannie Mae. Considering the human equation – and not just mathematical ones – they are the business models most exposed to the Chair’s new approach to communication.
The next public Fed commentary and Q&A are far more important than today’s. Bonds are likely to come back up in price between now and then. Then, we’ll see how difficult it will be for the Fannie Mae’s of the world to run.