Bernanke: Markets Tied to U.S. Currency
Today, the financial markets hinged on every word by Federal Reserve Chairman Ben Bernanke as he made a speech at the Economic Club of New York. Markets were waiting for some indication of a change in Fed policy or a comment on the dollar. They weren’t disappointed.
While he didn’t imply any change in Fed interest rate policy, he did take the rare step of commenting on the dollar as a step in reassuring global markets that the Fed isn’t asleep at the switch when it comes to the falling currency. Typically, all comments on the strength of the dollar are given by the Secretary of the Treasury.
Bernanke said that the dollar was one of four factors that can impact inflation and—to the extent that the dollar impacted the economic outlook— it would become more of a concern. Recently, the decline of the dollar has been correlated to market gains.
Evidence of the power of the Fed was the price of the dollar during the speech. At one point, when he indicated that the goals of the Fed to improve employment and avoid inflation would support the value of the dollar, the dollar spiked up quickly. But then fell back when he went on to say that he didn’t think there was a current asset bubble and traders took that to mean he was all talk and no action.
The lesson here is that the Federal Reserve, especially Chairman Bernanke, has more power to move markets that anyone. The President, the Treasury Secretary, and President’s council of economic advisers could talk until they were blue in the face and not have as much impact as the Fed does in one sentence. The politicians may get all the credit, and all the blame, for economic conditions, but it’s the Fed that holds all the economic power in the United States.7