So the Federal Reserve did not taper after all, as we know from its mini-bombshell of an announcement on September 18th. Having signaled in May and June that the central bank was likely to pare back its monthly purchases of $85 billion in mortgage and treasury bonds, the bank and its chairman Ben Bernanke essentially said “Never mind,” and decided that now was not the time after all.
The reaction was swift, vociferous, and excoriating. The financial community reacted as if it had been stabbed in the back. One longtime trader and respected commentator announced that he was “absolutely disgusted” by the decision or lack thereof. The best line came from a strategist at a leading investment house who said, “I am perplexed and baffled. I do this for a living. I shouldn’t be so confused and confounded.”
Actually he should be. We all should be. The Fed’s decision is a much-needed slap in the face to the financial world. The Fed’s statement was laden with typically stolid prose, but if you could have distilled it and the subsequent press conference by Bernanke, the message would have been simply this: “There is no certainty. Get over it.”
Time and again over the past few years, business and financial elites have decried the lack of certainty. Fortune 500 companies have routinely cited “uncertainty” emanating from Washington as a reason to delay hiring or hold off on investing. That was the primary conclusion of a University Colorado study this spring, whose authors concluded, “If policymakers would like companies to increase their hiring and investments, they should focus on policies that decrease business uncertainty.” That was particularly true at the end of 2012 as tax policy and the sequester were clouded in political controversy.
The hallmark of Ben Bernanke’s years at the helm of the Federal Reserve has been an unprecedented degree of transparency and communication about the thinking and deliberations of the bank. The Federal Reserve was created exactly a century ago, and for most of the past hundred years, even its decisions were opaque. There was no announcement of interest rate changes, and certainly no 24-hour news cycle and media ready to digest and report the minutia.
Under Bernanke, the cobwebs of mystery were cleared away. The various Fed governors have begun to speak more frequently and have been free to express contrasting views. Bernanke has regularly communicated the Fed’s outlook, expectations and analysis, and reminded all who care to listen that all future policy will be subject to the ever-morphing statistical landscape and to new data.
But while that policy was intended to lift the oracular veil, the desire for certainty has trumped it. Judging by the aggrieved reactions to the Fed’s taper change of heart, market players have increasingly taken Bernanke’s transparency and turned it into a road map for the future. The policy of openness was in part intended to lessen market volatility and to remove the risk that markets would overreact when policy changes were announced. Instead, it has lulled a lazy investment community into a new form of dependency.
That isn’t an indictment of the transparency. It is, rather, a reminder that too many business and financial leaders seek certainty where none exists. The Fed or any institution should be able to change its mind when circumstances change. A stated policy one month may make little sense a year later if the world has shifted sufficiently. Nimbleness and an ability to adapt to change are hallmarks of resilient institutions and societies. Cleaving to false certainty and demanding that the illusion of it be maintained is very much the modus operandi of dysfunction and decline.