Has market lost faith in Bernanke?

The Fed's so-far-mild policy shift doesn't seem to justify the depth of this plunge. But traders seem to have lost confidence in the Fed chief -- and are worrying about who comes next.

By MSN Money Partner Jun 20, 2013 5:36PM

Image: Federal Reserve Building © Hisham Ibrahim/CorbisBy John Carney for CNBC.com


Ben Bernanke has clearly "roiled" markets.


That's apparently the official word for the reaction to Bernanke and the FOMC's statements Wednesday -- roiled. It was everywhere Thursday as the market plunged.


But are the markets over-roiled? Bernanke on Wednesday explained the Fed's projected path to ending quantitative easing depends on the strength of the economy.


If the economy performs as strongly as the Fed expects, organic economic growth will be allowed to replace policy-driven growth. If the economy underperforms, policies intended to stimulate growth will be kept in place for longer.


That should not be a reason for a massive selloff of financial assets. So what's going on?


Crisis of confidence

The stock market selloff may be a vote of no confidence in Bernanke and whoever follows him into the Fed chair next year.


If you think the Fed will taper faster than the economy grows, then a dip in equities is justified. A mistaken confidence in the strength of the economy by policymakers can easily become a drag -- especially if you think policymakers are likely to stick to their rosy views in the face of contrary evidence.


So what about bonds? They've also taken a massive hit. Here the picture is even less clear. In one sense, this is what you would expect. Bond yields take their cues from the expected path of future policy rates. The announcement that the Fed expects the end of QE next summer at least puts higher rates as a realistic possibility for, perhaps, 2015.


On the other hand, those who think the Fed is wrong about the strength of the economy should believe that rates will stay lower for longer. That is, they should be buying bonds on the dips. Unless, like those selling stocks, they believe the Fed will tighten too early—raising rates or paring back QE in the face of an economy that is actually still weak. Again, it's a vote of no confidence in the Fed.


No more cranking away

Finally, there's the question of what I'll call the Krugman Crank. Paul Krugman has forcibly argues in the New York Times for the view that the Fed's best -- perhaps only -- tool when interest rates are the zero bound is shaping expectations.


If the Fed can convince markets that it will keep turning the money crank even after the economy recovers, to the point of allowing inflation to rise beyond the usual target, it can encourage demand growth, Krugman contends.


The key to this, however, is that the Fed must credibly promise to be irresponsible. If the market does not believe the Fed will be irresponsible when it comes to inflation, the expectations channel breaks down.


What we may be seeing Thursday is the perception that the Krugman Crank is broken -- that the market no longer believes the Fed can credibly promise to be irresponsible. Which means that Fed policy becomes ineffective at the zero bound. So that even if the Fed did react appropriately to a slumping economy by refusing to taper as planned, it might not make a difference.


I'm sorry that so much of this depends on the central bank trying to control -- or losing control -- of what markets expect. Even worse, it depends on whether markets expect that the Fed can control what the market expects. The image of mirrors staring into mirrors comes to mind. But that is simply the world we live in.


Of course, it's still early days. We don't know how deep the selloff will go, or how long it will run. Perhaps the post-FOMC market moves will just be a blip. Sometimes a roil is just a roil.


— By CNBC's John Carney. Follow him on Twitter @Carney.


Also on CNBC.com:

Boehner: Bernanke's Fed to blame for sell-off


Santelli goes off  on Fed, sets Twitter on fire


Obama: Bernanke at Fed ‘longer than he wanted’ 


Jun 20, 2013 6:39PM
Notice when Bernanke walked to the podium he was laughing slightly. They are simply running the economy to exactly where they want it to go. Then they will make as much money as they can fit into their pockets and then retire. Simply put, we are screwed because we never know when the manipulations will come. Some day they will get whats coming to them. Maybe then we can laugh slightly too.
Jun 20, 2013 6:46PM
The problem with never ending low interest rates is that it can have unintended consequences if allowed to linger too long without allowing market forces to eventually takeover. Consequences such as the FEDS bloated balance sheet and the absence of fair price discovery. The markets are losing faith that they can keep playing this game of robbing Peter to pay Paul without rewarding the Workers whom are the foundation of any given economy. That's a recipe for disaster over the long haul.
Jun 20, 2013 8:53PM

Looks like social security will continue to be a primary source of retirement income for the lost middle class. We sure the hell can not depend on our 401k money as the stock market is manipulated for income growth for only a few. retirement plans are gone and the health care system has been for many years a mess and needs a total over-haul. I and many others have lost faith in the USA retirement, educational and health care system. I thought as a Vet I would never lose faith in our countries abilities to solve our problems but I have, we no longer lead the way in the world. This country is motivated by greed .  

Jun 20, 2013 6:33PM
How about maybe the Smart Money knows it's not just about what Uncle Ben does. China and Japan are imploding while the Euro-zone has soaring unemployment while being in a recession. Yet folks want the Smart Money to sit and worry only about what Uncle Ben does. Dumb Money will only pay attention the Uncle Ben. Smart Money will pay attention to everything.
Jun 20, 2013 7:44PM
Maybe the "market" realizes the gravy train cheap stimulus money has come to an end and now some real growth and value has to be shown. That will take real work and some difficult decisions that won't be popular. Clearly something that short term money managers don't seem to have the stomach for. Kind of like politicians, no stomach for difficult, unpopular decisions.
Jun 20, 2013 6:58PM
This has been coming all along.  Liberals, just were not getting it.  Doesn't seem that most of them will ever get it.  Even with the information constantly right in their faces.
Jun 20, 2013 7:54PM
Do not blame me, I did not vote for President Obama.  Romney wanted to replace Bernanke, and begin making changes that would actually improve economy, not artificially pump up the economy by printing money 24/7.  This bubble had to burst, but the market was actually due for a correction.  It is not dooms day as in 2008, but it seems very much like the malaise of the late 1970's without sky high interest rates.
Jun 20, 2013 7:10PM
Stupid question and a smokescreen question. It was Bernankes stupid paper printing that caused the market swing and now the crash. The market should be based on profit asnd loss but this was based on free paper which was used to prop up business. the paper stops the investing stops and market tanks/.
Jun 20, 2013 7:04PM
Wait a minut Did I miss something?  ..... Did the market ever have faith in Bernanke.  

Jun 20, 2013 7:19PM

No more hand holding, Wall Street.


Time to stand on your own 2 feet.


Wow! That is absolutely poetic!


After all these years, I think I found my calling!

Jun 20, 2013 8:14PM

Wall St. traders are like spoiled kids that throw a tantrum when they dont get their way. Its about time Main St. gets a break from dollar devaluation and out of control speculation driving energy

and commodity prices higher with out regard to supply and demand. Krugman should get 2 days

in the electric chair and if he survives give him a real job for minimum wage.

Jun 20, 2013 6:51PM

"Sometimes a roil is just a roil."


Yeah, and sometimes a BOIL is just a BOIL.


Does this article sound like a drug seeker seeking drugs, or what? 

Jun 20, 2013 9:52PM

Sorry Middle Class,


It's motivated by STUPIDITY


Stupidity on most of the voters, who still think they have a choice, and stupidity of the 1% who think that they will NEVER be in danger.


Got news for you 1%..   Look up the French Revolution!!!

Jun 20, 2013 9:02PM
Invest in wheelbarrows - you'll need one to cart your Obama dollars into the grocery for that loaf of bread.
Jun 20, 2013 9:07PM
Wall Street is blaming Bernache. Wall Street is the problem!! Bernache could have said they werent going to stop anything and Wall street would have still dumped. Wall Street is dead set on giving away the gains from it investers no matter what. Wall street is the only fool in all this!!
Jun 21, 2013 5:13AM
the traders on wall street are getting the market down so the insider trading can profit.....
Jun 21, 2013 5:23AM
Hey look, The only place where there is steady growth is in the Washington DC metro area! this is where all the construction is going on right now.
Jun 20, 2013 6:32PM
With strong economic growth in both of our nations largest economies, California at 3.5% and Texas at 4.8% and the housing market improving, I wouldn't be a bit surprised to see the DOW rebound 300 points tomorrow. What we saw today was bi-polar computer trading, because there was no change in the feds policies.
Jun 20, 2013 6:41PM
A large number of posters are saying there was no recovery and that low interest rates impeded the economy. Both statements are wrong. Regardless of how the markets achieved their highs, they did set records. If you failed to benefit, that was a YOU Problem. Low interest rates have been a boon to most Corporations. The proof is in the year after year of Record Profits and Record cash on hand. Go back and look at where North American Auto sales where after the Great Recession and where they are now, big Difference. North American Auto companies are far better structured and as strong as ever. We have a huge Fracking Boom and Companies like Apple, Google, Disney, Big Oil, Auto, etc,etc are doing extremely well. And of course, all of the Big Banks, thanks to the FEDS backstops via Uncle Ben.
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