On the face of it Mr Bernanke said not very much at all. So you do have to ask why the markets and in particular the financial sector rallied so hard? Did he say something we didn’t pick up on?
Well the highlights were that the Fed would just not allow deflation. Which means there will absolutely not be any exit from the lose money policy. The fed will NOT shrink it’s balance sheet. Which in turn means the Fed will keep ploughing money back from bonds that are at term, back into purchasing new bonds. Thus QE-light, as it is being called, is now a fixture.
The other significant thing was when he said that he felt bond purchases had the best effect, gave the most bang for the buck, when bought at a time of acute stress. I take this to be code for, the Fed will buy bonds, as many as it takes, if the banks, the Big Banks, get in sharp, acute trouble. Equally important, I think, is that by saying bond purchases work best in crisis, he was also broadly saying that he does not see the Fed being in the business of long term purchases to support long-term debts. Who was he thinking of? I think he was talking about States finances. If I am right he was essentially saying, don’t worry boys, whatever we have left is going to be for Wall Street not for helping out bankrupt States and their funding problems.
Now I could be completely wrong here. It just seems to me there has to be something he said to justify 170 point rally.
As for the final outcome of this meeting, I don’t think Mr Bernanke’s speech today is the main event. Even though it has had a spectacularly positive effect on the markets. I am waiting to see what people read into the harmony or otherwise between Europe and the U.S. For me, that is the crux of the matter. We’ll see.