Sign in
Become a MarketWatch member today
David Callaway Archives | Email alerts
Sept. 21, 2011, 6:06 p.m. EDT
By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- Federal Reserve Chairman Ben Bernanke, under fire from both Democrats and Republicans, achieved a political master stroke Wednesday on par with President Barack Obama and only a few other politicians in modern history "” executing a plan that makes nobody happy.
The Fed's decision to "twist" the yield curve on government bonds to keep interest rates low upset the markets because it was not deemed enough of a stimulus to revive the economy. It irritated Republicans who had demanded he do nothing to help the economy. And it will likely infuriate Democrats looking to gain control of the nation's central bank.
In short, the Fed just spent one of its last precious silver bullets to fight against global financial calamity and was rewarded by a massive sell-off in stocks and commodities, a rally in bonds that sent yields of the 10-year note to a record low, and a rush to the beleaguered dollar as investors looked for somewhere to hide.
Where's Meg Whitman when you need her? Oh yeah, good luck Hewlett-Packard Co. /quotes/zigman/229301/quotes/nls/hpq HPQ +6.72% . See story on H-P's interest in Whitman.
To be fair, Bernanke had few choices. Of them, his best bet would have been to hold off on anything and let the Europeans throw their Hail Mary pass before committing the Fed to more financial risk. But the markets were clamoring for a sign, any sign, that the central bank would ride to their rescue for a third time in this financial crisis. As soon as they got it, they dumped all over the Fed, pulling the financial football from underneath the hapless Charlie Brown once again.
None of this will please the GOP, which believes Bernanke and the Fed are dupes of Obama and are spending America into financial oblivion. See story on GOP demands for Bernanke to stop.
Or some Democrats, including Rep. Barney Frank (D., Mass.), who argue the Fed's independence stands in the way of vital economic policy making right now because it is not spending enough. He wants to make the 12 regional Fed presidents, five of whom are on the Federal Open Market Committee at any one time, political appointees like the rest of the Fed's governors, including Bernanke.
So Bernanke was walking a fine line before Wednesday's decision to avoid political interference and underscore the Fed's independence while giving the global economy the help it needs. Swing and a miss.
Perhaps it was the leaks ahead of time that convinced the markets this was coming. The sounds of Chubby Checker's "The Twist" even rang through the Treasury press room before the announcement. Perhaps there is nothing left the Fed can do short of more coordinated moves with other central banks, like it assisted with last week. Perhaps the markets still need to fall further in order to discount the expected pain to the financial system that a Greek default will cause many banks when it occurs.
But Bernanke has achieved a rare universal condemnation, with the possible exception of the short-sellers. Even Alan Greenspan had (and still, kind of, has) his supporters.
The Fed's move to buy bonds with longer-dated maturities and sell those with shorter maturities, to push yields lower, was tried before, 50 years ago in 1961, on a smaller scale though. It is unlikely to have much effect. A major line in the sand needs to be drawn in Europe in the next few weeks and until then the markets are hostage to the headlines.
One by one in the last few weeks, some of the heaviest hitters on the global financial stage have warned we are approaching a breaking point. George Soros, Roger Altman, Larry Summers, among others. With financial leaders meeting in Washington this weekend for the International Monetary Fund meeting, there is perhaps one more chance to impose a solution.
"?Twist Again' Ben and Federal Reserve, however, are sadly not it.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A... Expand
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator. Collapse
Editor's View
"?Twist Again' Ben's political master stroke
Your Portfolio
5 stock-market trends you don't want to miss
On Canada
Ethical oil fire smoulders in Canada
Marder on Markets
Twisting in the wind
Significant trading channel
Mutual Funds
Honesty is always the best policy
Political Capital
Is Obama using a rope-a-dope strategy?
Ways and Means
Long-term care plans: Most still don't buy in
Rex On Techs
Apple's silence on iPod speaks volumes
Life Savings
Grantham: "?No market for young men'
Read Full Article »