Bernanke's 'Clint Eastwood' Moment

Ben Bernanke sneezed and the Japanese caught cold.

"Tapering," the Fed chairman's signal to the markets that the central bank would be ever so gentle when it withdrew quantitative easing, was read by traders as the dawn of a new tightening regime. Hedge funds promptly covered their short positions in the yen, and domestic Japanese investors covered theirs. The yen gave up 10 hard-fought, big figures of decline, and Japanese equities dropped by 20%. Pity the Japanese central bankers who thought they were the masters of their own destiny.

The time for subtlety is over. Wednesday's Federal Open Market Committee meeting may be Bernanke's last chance to get this right. His verbal interventions, including Thursday's "analysis" piece by the Fed's favorite verbal vehicle, Jon Hilsenrath (conveniently dropped in the online edition of The Wall Street Journal at 3:30 p.m. EDT, just in time to fuel a powerful stock rally at the close), haven't worked. Hilsenrath's focus on long rates was seen for what it was: a thinly veiled attempt to tell hyperactive traders to relax.

Traders aren't going to relax. But they can be bullied, and that's what I think Bernanke will do. The Fed won't change the amount of securities it buys -- but I think it will shift that mix of securities to long-dated Treasurys only, rather than a balance between Treasuries and mortgage-backed securities. The stock market does not expect it, and the bond market surely doesn't.

If he wants to keep long rates in check, going to war with the bond market by doubling the size of his long-dated Treasury purchases will work a whole lot better than placing an item in Hilsenrath's next column. The 10-year rate will come down -- and fast -- and the yen can return to its status as the favorite of carry-traders the world over. The likely increase in mortgage-backed yields will be cheered by pension funds and other yield-hungry investors who will finally have something to buy. Bernanke will also have a post-meeting press conference to use in delivering to bond vigilantes a message they can understand -- that there's more where that came from.

For Bernanke, the stakes of cratering the Japanese economy and triggering a worldwide selloff in stocks are just too high for him to continue being subtle. This has become a Clint Eastwood moment for Bernanke, who needs to tell bond traders to make his day.