A Slip of the Tongue Can Be a Good Thing

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.  

I came in as the sun came up.
She glared at me over her coffee cup.
She said, "Where you been?" so I thought real hard
And said, "I fell asleep in that hammock in the yard."
She said, "You don't know it boy, but you just blew it."
And I said, "Well that's my story and I'm sticking to it... 

I got that deer-in-the-headlight look.
She read my face like the cover of a book
And said, "Don't expect me to believe all that static,
'cause just last week I threw that hammock in the attic."
My skin got so thin so you could see right through it,
and I stuttered, "Well that's my story and I'm stickin t-t-to it.
- Collin Raye 

As market watchers know all too well, the chairman of the Fed has tremendous power over financial and economic markets the world over. In past years, interest rate shifts up or down in small increments would reverberate throughout the world, affecting NPVs of every project from building a new oil rig to a night of dinner and dancing.*

In fact, the shifting of interest rates is such a powerful tool that even the indication that rates might move could have a dramatic affect on market prices. Greenspan used this high sensitivity to his advantage, likely spending more time with a thesaurus than any poet in the 19^th century. 

Every six weeks when the Fed's Federal Open Market Committee (FOMC) released its statements, traders of all stripes would pour over every word for any change and deliberate about what that change might mean. Even today, Bloomberg and other news services provide a side-by-side comparison of the current statement with the most recent version, highlighting every detail that differs in any manner.

Many times, Greenspan would try to nudge the markets one way and his "push" would be misinterpreted as a "pull." No problem. He would simply come back into the public and push harder until the message was received. It is widely believed that he used one or two reporters as mouthpieces throughout his 18+ years in the Chairman's seat. Traders took the columns written by these reporters as though they were written by Greenspan himself.

Ben Bernanke is a different animal entirely. Working with the state of opaque communications left by Greenspan, Bernanke has embarked on a new experiment: transparency. In addition to speeding up the release of FOMC meeting minutes, appearing on 60 Minutes twice, and allowing some dust to gather on the Fed's thesaurus, Bernanke embarked on a great experiment last week: a press conference.

Not only that, the way the press conference was conducted — with just 15 minutes of prepared remarks followed by 45 minutes of Q&A — he left himself wide open for a potential gaffe or two.

And that may have happened.

Early in the questioning, Bernanke was asked to define the phrase "extended period" and in his reply, he stated, "Extended period suggests that there would be a couple of meetings before - before action..."

So, we now know that once the "extended period" language is dropped, we have just two meetings, or about three months, until "action" will take place (now, we can debate what the word "action" means, I guess). It's hard to overstate the amount of energy and analysis that has been put into determining the meaning of these two words. A Google search of "extended period" returned over 28 million hits, whereas the more widely used phrase "long period" only returned 12 million.

Whether this was an actual slip of the tongue or a carefully orchestrated placement of information, we'll never know. But either way, I believe Bernanke is happy. Greater transparency necessarily includes the risk of exposing information that you wouldn't otherwise share. If the Fed has been using a "two meeting test" for retaining this language in the last 18 FOMC meetings, it's good that everyone now knows it.

* Yes, sometimes I think of spending money on entertainment in terms of Net Present Value. To my wife's great confusion, I am often attempting to discern the peak of our combined utility curves for such activities as choice of vacation, how to spend a Saturday, and even where to go to dinner. She is one lucky woman!