Kremlinology

Commentators spent the weekend trying to figure out what Janet Yellen's testimony before the Senate meant for markets. What did she say? What did it mean? Why was she there at all?

“It is important to emphasize that a modification of the [interest-rate] guidance should not be read as indicating that the [Fed] will necessarily increase the target rate in a couple of meetings,” Ms. Yellen told the Senate.

The modification in question was the elimination of the word “patience” in reference to the Fed's decision to raise short-term interest rates.

Here, we offer a translation: Pssst … the coast is clear.

Photo credit: DPA

Forward Misguidance

The Fed claims to provide “forward guidance” to investors and businesses. By letting us all know what is coming, we are supposed to be able to plan our financial affairs in an orderly fashion. Should we refinance our houses? Should we take on more debt to build a new factory? Would it be better to wait before expecting a price increase?

That is the theory of it. In practice, it is nothing more than tomfoolery mixed with scam. We don't recall the Fed offering any “forward guidance on the great credit crisis of 2008-09. On the contrary, former Fed chairman Ben Bernanke was offering forward misguidance.

In March 2007, for example, the nation's top central banker famously claimed that the “impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.”

And then – after the problems in the sub-prime market not only spilled over, but also put much of the economy underwater – Bernanke offered some “backward guidance.”

He revealed why forward guidance was nothing more than a card trick. The Fed can only react to events, Bernanke explained; it was impossible to see a crisis coming… even when it was one you helped cause yourself.