What Bernanke Realy Meant?

24 July 2013
Good news is bad news. When FED Chairman Ben Bernanke whispered loudly that the monetary easing may be coming to end, he actually meant that U.S. economy is recovering slowly and steadily. Therefore money printing would be tapered or even reversed within a year. Why this long waited good news has sent a panic waves across the markets and emerging economies faced with a dramatic fund withdrawals, leading a collapse in the stock exchanges, rising interest rates and falling exchange rates. Straightforward answer to this question is that it was a wake up call to so called “hot money”; Easy money will not be here for ever, so you better get prepared.
Hot money took the message seriously and headed to exits quickly. It was so quick quick that it caused stampede in some countries like Brazil and Turkey where vulnerabilities are relatively high. Just within a few days risk appetite got almost frozen leading sharp declines in emerging economies. So far, this story is well known to everyone but the rest of the story is a bit confusing. Why did Bernanke altered his speech during last week’s testimony before the Congress, and blurred his view of U.S. economy? Many answers may be given to this question which may be reasonable to many of you. Here is my explanation: When Bernanke implied a tapering of monetary easing, he did not mean that he removed two benchmarks – inflation rate and unemployment rate- as his “easy” monetary policy guidance .
As long as this two pillars remain in place, FED will not reverse its easing policy. So by playing with words he deliberately created uncertainty and screwed
high risk appetite to some extend. Second, As soon as he spotted that he spiked the bubble in high risk instruments he then softened his tone in tapering process. Will he succeed in his strategy of playing with expectations? Time will tell, but  as the following charts clearly indicate that every time the market players adjust to new policy set up, FED’s move will loose its effectiveness and we will be go back to square one.