Decode Bernanke's Pivotal Message to Financial Markets

Sometimes a Fool can encounter foreign languages even within their own native tongue.

From scrutinizing the ingredients in our food, to reviewing the fine print of a legal contract, everyone has experienced some form of disconnect from the languages that prevail within certain segments of our society.

Central bankers speak in a language all their own. I can recall from my youth observing a nation's rapture in Alan Greenspan's every word, although I did not yet possess the vocabulary to interpret them. After devising my own primer by watching every detail of this financial crisis unfold, I offer one Fool's translation of Fed Chairman Ben Bernanke's pivotal speech delivered Friday in Jackson Hole, Wyoming.

Here are a few poignant excerpts from that speech, followed by my own translations (in italics).

Bernanke: Central bankers alone cannot solve the world's economic problems.
Translation: Having witnessed my predecessor's legacy-busting fall from grace, I ask you to never lose sight of my Earth-bound limitations.

Bernanke: At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand -- notably, consumer spending and business fixed investment -- must ultimately take the lead.
Translation: If bellwether corporate CEOs like Nucor's (NYSE: NUE  ) Dan DiMicco are warning that they see no sign of sustainable final demand growth, then you may wish to alter your recovery expectations accordingly.

Bernanke: Incoming data on the labor market have remained disappointing. Private-sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation, and initial claims for unemployment insurance remain high. Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty.
Translation: Who am I kidding? Of course I will print more dollars and try to absorb waning Chinese demand for U.S. Treasuries. For some protection, you may wish to consider some investment in growing gold producers like Goldcorp (NYSE: GG  ) , Eldorado Gold (NYSE: EGO  ) , or a budding silver miner like Endeavour Silver (AMEX: EXK  ) .

Bernanke: The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.
Translation: Oh yeah ... we have a whole shed full of tools. Some of them won't work, and others may explode in a pandemonium of unintended consequences; but we definitely have tools.

Bernanke: One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions.

Translation: We don't really know how to operate our biggest remaining tool (the instructions are written in Chinese), and we'll be lucky if it doesn't chop off our leg.

Bernanke: [T]he statement currently reflects the FOMC's anticipation that exceptionally low rates will be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language in the statement to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets.
Translation: And if accelerated quantitative easing doesn't do the trick, we always have words. Oh yeah ... words. Shazam! Abracadabra!

Bernanke: A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. [...] Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points. The effect on longer-term rates would probably be even less [...]. Moreover, such an action could disrupt some key financial markets and institutions.
Translation: Our third option wouldn't accomplish much at all, and could in fact wreak havoc on the financial system, but at least that would silence some criticism that I'm only looking out for my fellow bankers at Goldman Sachs (NYSE: GS  ) and JP Morgan Chase (NYSE: JPM  ) . After all, I had no choice but to make Goldman whole on those failed AIG (NYSE: AIG  ) derivatives.

Bernanke: Although what I have just described is, I believe, the most plausible outcome, macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments.
Translation: I've been disastrously wrong before, and I will almost certainly be wrong again. Good thing the stakes aren't high.

Depending upon the dialect of one's own financial paradigm, Bernanke's recent speech is of course open to multiple interpretations. Please consider offering your own translation of Bernanke's message to financial markets, in the comments section below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Eldorado Gold, Endeavour Silver, and Nucor. The Motley Fool's disclosure policy is presented in plain English.


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  • Report this Comment On August 31, 2010, at 7:40 AM, jesusfreakinco wrote:

    Classic post. Thanks Sinchi!

    JFC

  • Report this Comment On September 03, 2010, at 1:16 PM, ashtanga99 wrote:

    Translation (Overall): I have no idea what I am doing and never did; but aren't you impressed with how I sound like I do. Lastly, I don't want anyone to think I am just another plant placed here to protect Goldmans Sachs interests yet to pretend I care about the US Economy.

    Great stuff Chris (Spades Guru), I look forward to catching up on all of your articles.

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