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PIMCO: The Three Messages Ben Bernanke Has Sent to Placate Investors


These important takeaways have shelf life and will likely remain in force, influencing the bond market for quite some time.

The potency of the Federal Reserve's monetary elixir has become so great that today's propitious investors see purgatory as heaven, finding nirvana in the netherworld of stagnant economic growth and in the feasts of monetary gluttony the central bank gods provide. Heaven can wait! Such is the mantra of today's investor, yet heaven should be seen as the restoration of economic growth and competitiveness both in the United States and throughout the developed world. Investors seem to have forgotten this, because they've feasted on the fruit of the central banker's garden, becoming entranced by the allure of printing presses rolling through eternity.

The Federal Reserve attempted in June to wake unsuspecting investors from their trance by indicating it might begin to create less heavenly conditions and reduce its bond buying. Made aware of their vulnerability, investors ran for cover faster than Adam and Eve, leading to very significant market volatility.

Yet the Fed – through its current Chairman Ben Bernanke or his soon-to-be-named successor – is not about to abandon investors in the garden alone amid the many dangers that lurk. Economic growth is anything but divine, running well below the more celestial levels of 5% for nominal GDP and close to 3% for real GDP – economic growth over the past three quarters has been closer to the ground at 2.9% and 1.4%, respectively (see Figure 1).

Returning Calm to the Bond Market

No wonder, then, that ever since the maelstrom in June, Bernanke and his angels at the Federal Reserve have used their powers of persuasion to placate troubled investors. The effort, for now, appears to have worked, with calm returning to both the stock and bond markets, and investors again content with the way things are, ever hopeful that the future will be better and that economic growth rates will return to the days of old. The Fed needs investors to be believers in order to reflate deflated asset prices and thereby build a pearly bridge to a time when factors beyond just the Fed's monetary elixir begin contributing to growth.

Below are the three messages that Ben Bernanke and the Federal Reserve have conveyed since June to restore calm to the financial markets, and dampen interest rate volatility, a major goal of the Federal Reserve's activist policy regime. We believe these important takeaways have shelf life and will remain in force, influencing the bond market for quite some time.
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