The market whisperer

In a few weeks time, President Obama is to announce the successor of Ben Bernanke, the current Chairman of the US Federal Reserve (FED). Two candidates are likely: Janet Yellen, whose ideas are similar to those of Mr Bernanke, or Larry Summer, the former Secretary of the Treasury and who is apparently favoured by the US president.

The aptitudes requested from Mr Bernanke’s successor are numerous including an encyclopaedic economic culture and leadership skills. However, when making his choice, Barack Obama will certainly not forget that the future Chairman of the FED must also be a linguist, a semiotician and a sort of griot in macro-economy.

Inventing or giving rare words a new meaning was what Alan Greenspan frequently did during his time, including his famous “conundrum”. More recently, tapering has emerged in the vocabulary of central bankers. To taper literally means “to become gradually thinner or narrower at one end”. The US central bank is therefore set to gradually narrow its quantitative easing programme, in another expression invented by central bankers and which has been highly fashionable since the 2008 crisis.

The reference to an industrial technical term is very astute since it suggests that interventions by the central bank are meticulously steered with all the rigour befitting the most start-of-the-art industries. In its tapering, the central bank is transforming itself into a macro-economic engineer adjusting its actions depending on a multitude of indicators ranging from GDP to new home sales.

However, macro-economy is not an exact science, engineering is sometimes faulty and the central banker is constantly obliged to find new words and new weapons. Another newcomer in central banking vocabulary is forward guidance.

The word guidance is much used by economists and stockbrokers: a company’s guidance constitutes the provisional figures that its management supplies to the market. Forward guidance therefore resembles something of a pleonasm. The layperson may be tempted to think that guidance is by definition forward.

Until recently, central bankers were content to provide guidance and short-term forecasts and announce to the market their directional bias for rates between now and the next meeting. With forward guidance, they are now trying to influence the markets over the longer-term. In so doing, they reassure investors that they can adjust their expectations in a more measured and less brutal manner than previously.

More than the technical aspect, by talking of forward guidance central bankers provide the idea of a long-term vision, making them the ones that can see beyond and are one step ahead. shaman or griot, the central banker becomes “he that knows”.

Where does he his knowledge come from? From the myriad of macro-economic data mentioned above, but also from market observation. In a curious game of mirrors, the central banker listens to the markets that listen to the central banker. If rates relax too quickly, Mr Bernanke reassures, if on the contrary, the markets are dangerously euphoric, he brings them back to order by reminding that quantitative easing is destined to be phased out. In order to keep the harmony of this twin-step between the markets and central banks, it is vital for the central banker to maintain control of the message, the speech and the words in order to continue leading the dance by whispering to the markets…

Didier Le Menestrel
with the king help of Marc Craquelin