Bernanke Was Blunt And Indecisive At the Wrong Moment

The TV mob boss once uttered that a wrong decision is better than indecision. Heading into last Wednesday's Federal Reserve meeting announcement and Ben Bernanke's press conference, market participants were expecting reassurance that the Fed's bond buying program of $85 billion of mortgages and treasuries - otherwise known as QE3 - was here to stay. They wanted confident, decisive leadership.

What they got instead was a seemingly befuddled Bernanke who not only failed to reassure the markets, but also in turn sent both the bond and stock markets into a tailspin.

The root of the problem was largely due to the Federal Reserve's apparent indecision with regards to QE3, the $85 billion a month bond buying program. Investors may make mistakes but they have good memories.

One does not have to dig too deep into the memory bank to recall that in January of 2008 Mr. Bernanke told the press: "The Federal Reserve is not currently forecasting a recession." More alarming was a statement in June of 2008, right after Bear Sterns was bailed out when he declared the "risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

On Wednesday, he announced that the Federal Open Market Committee foresees the economy "continuing to grow at a moderate pace" and that job gains and a strengthening housing markets are sustaining consumer confidence and household spending.

This belief fails to understand that the FOMC's QE3 program is the lifeblood of the statistics he is applauding; implying that spending, lending and optimism is happening in a vacuum to which the Fed is merely an observer.

Herein lies the problem.

The Chairman gave specific and decisive language on short term interest rates.

He stated that in no uncertain terms, short term rates will be at 0 to 0.25% until unemployment is 6.5% and inflation remains below 2.5%. This is in stark contrast to the wordy and non-specific language used to update the market on QE3.

Chairman Bernanke is able to be hyper-specific on short term rates, setting clear and concise targets, yet when it comes to the more important economy-stabilizing purchasing program the Fed turns so indecisive that the market's only reaction is to sell.

A widely held thought is that if the Fed stopped bond-buying prematurely, the price levels of investible assets would fall. But given the Fed's ability to clearly broadcast its interest rate intentions --while specifically failing to broadcast its purchasing intentions -- it raises the question, why?

Quantitative Easing was never intended to be permanent. The program was to be: 1.) stimulative, 2.) short term, and 3.) replacement for lost liquidity in the marketplace due to the housing crash, the flight to safety and the threat of economic depression.

Unfortunately, it has made investing more difficult by skewing risk analysis and potentially causing mispriced assets.

In short, the Fed DID save us from a calamitous recession or worse. BUT in turn, it may have created another bubble. The markets are scarily dependent on the continuation of permanent easy money and the Fed must be realizing the risks of continuation or it would be more precise in its language.

The Fed approach is sensible if GDP growth is sustainable,coupled with job growth and price stabilization.

If the Fed is wrong, however, we will all pay a dear price - but none more so than the reputation of Mr. Bernanke who had a chance to ease the market off QE, and instead chose to be blunt and indecisive at exactly the wrong moment.