Hanging On Bernanke's Every Word

Every once in a while something happens in the market that makes me say, "Huh?" Today was one of those days. Treasury prices plummeted and the dollar strengthened. What caused such a day on Wall Street? Bankers were paying attention to a speech that Federal Reserve Chairman Ben Bernanke gave last night. They were paying a little too much attention if you ask me.

First, those events. Here's what happened with Treasuries, per the Wall Street Journal:

The 30-year bond suffered the most Friday, falling by more than two points in price to hit a 4.22% yield. A week ago it was at 3.99%.

The 10-year note was off 1 2/32 to 3.38%, compared with 3.22% a week ago, and the two-year was down by 4/32 to a 0.96% yield after yielding 0.87% a week ago Friday.

And here's the dollar's news, via Reuters:

The U.S. dollar, which took a beating for much of the week, recovered some losses against the euro and pulled away from a more than 8-month low against the yen earlier in the week.

Most accounts I'm seeing that explain these two market movements say that Bernanke's speech last night seemed a more hawkish about inflation than usual. Carl Gutierrez over at Forbes has a good take on the influence of Bernanke's words. Here's his explanation of what caused the change:

In the speech delivered at the Federal Reserve board conference, Bernanke said, "My colleagues at the Federal Reserve and I believe that the accommodative policies will likely be warranted for an extended period." Innocuous though it may sound, this one sentence breaks sharply from the Federal Open Market Committee's latest policy statement, which said that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

And there's where my "Huh?" comes from. Let's compare these two quotes. First, from yesterday's speech:

My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.

And then from the most recent FOMC statement:

The Committee . . . continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Again, I repeat, "Huh?" I have to squint to see any difference between these two statements. The only one I can vaguely notice is that "accommodative policies" are not necessarily "exceptionally low levels of the federal funds rate." Otherwise, those statements look identical to me. Of course, a low fed funds rate is an accommodative policy, so they don't necessarily even differ.

In what follows in that exit strategy section of Bernanke's speech from yesterday, he says he worries about inflation. So maybe that's what the market is grappling on to? Yet, maybe I've been misunderstanding, but I thought he was always worried about inflation, ultimately. That's different from saying that he's going to raise rates anytime soon; I'm pretty sure he won't. Of course, eventually he'll have to raise rates, but that reality should always have been obvious to any observer of the Fed.

Just because Bernanke says something that slightly suggests he might worry about inflation and raise interest rates eventually, the market moves. That demonstrates a sort of broader point that's always annoyed me about the financial markets: they're way oversensitive. Nothing that Bernanke said last night was fundamentally new or ground breaking that should drive significant changes in the dollar or Treasury prices, yet that's exactly what happened.