Ben Bernanke and the markets are having a hard time understanding each other.
Despite a near uniform consensus on Wall Street that the Federal Reserve would start to withdraw its economic stimulus this month, the central bank surprised strategists by announcing Wednesday that it would indefinitely maintain its bond-buying program at full strength.
While the continuation of the stimulus program helps stock investors, the Fed's apparent change of heart sowed confusion that is likely to last in markets around the world. Many on Wall Street were left wondering how they got it so wrong, with several pointing an accusing finger at Bernanke, the Fed chairman, and the central bank's communication strategy.
For his part, Bernanke appeared to put some of the blame on Wall Street.
“The Fed and the market have not been on the same page, and that's very apparent in what happened” Wednesday,” said Michael Hanson, senior U.S. economist at Bank of America, and one of the few strategists to have predicted that the Fed would stand pat on its bond buying.
Since May, when Bernanke first signaled that the Fed could start to wind down its efforts to stimulate borrowing and the economic growth, Wall Street has been preoccupied with predicting when and by what degree that would happen. At its June meeting, Fed policymakers said that the economy was nearly strong enough to begin doing without the full force of the stimulus program.
As a result, investors around the world spent much of the summer adjusting to the idea that the Fed would begin a retreat from its monthly buying of $85 billion in Treasuries and mortgage-backed securities.
Figuring out what would come next involved navigating in uncharted territory: the breadth and scale of the steps taken by the central bank to get the economy back on its feet in the wake of the financial crisis have been without precedent. The bond-buying programs have helped push up stock prices and kept interest rates low, making it easier for borrowers to take out home and auto loans.
The expectation that those programs would soon start to ease has caused interest rates to rise, which has hurt many emerging market economies that had come to rely on lower rates.
The recent preparations paved the way for the mixture of confusion and euphoria that broke out Wednesday.
“Delay is good policy, the communications strategy is in pieces,” Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a note.
Bernanke still suggested that a pullback could begin later this year, but he said that Fed officials had determined that the economy was not on a strong enough footing to begin adjusting its stimulus programs this month.
In his press conference after the Fed's statement, Bernanke appeared to acknowledge that the central bank had gone against the expectations of the market. Bernanke said that part of the problem was the sheer complexity of the stimulus programs, which made it hard to predict future policy.
“We are dealing with tools that are less familiar and harder to communicate about,” he said.
But Bernanke suggested that some investors were not paying sufficient attention, pointing to his past promises not to change policy until economic data, and particularly unemployment numbers, showed significant improvement.
“Asset purchases are not on a preset course,” he said with audible frustration. “They've always been conditional on the data.”
On Wall Street, there were many competing theories about why the Fed had defied expectations.
Michael Gapen, the chief U.S. economist at Barclays, said that he believed the Fed had purposely misled investors to push up interest rates and knock out speculation in risky financial products.
Bernanke gave some fuel to this argument when he said Wednesday that he had been gratified to see the sell-off over the summer in more speculative products like junk bonds. But he also said that he was unhappy with the broader rise in interest rates, which had pushed up prices for mortgages and other consumer loans.
Most economists said that the disconnect between the Fed and Wall Street was more likely a result of unintentional flaws in the Fed's analysis and communications.
Paul Ashworth, the chief U.S. economist at Capital Economics, said that recent speeches by Fed officials had displayed a significant amount of disagreement at the central bank about how to move forward.
“They don't even appear to be able to agree on it themselves, internally, “ he said.