Metaphors Obfuscate Fed's Plans Regarding QE

Jacob Harper  |

You’d think Fed Chairman Ben Bernanke was in an episode of Matlock the way he bandies folksy metaphors. Except Bernanke isn’t trying to describe the oppressive summer heat – he’s answering a simple question: what’s the future of the $85 billion a month Federal bond-buying program?

While Bernanke has been cagey about answering questions about monetary policy directly, he has been resolute in his dedication to describing it poetically. Here’s a collection of his answers:

“To use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.”

“(Economic data) are guideposts that tell you how we’re going to be shifting the mix of our tools as we try to land this ship on a, you know, on a—in a smooth way onto the aircraft carrier.”

The trend has caught on. From Richmond Fed president, Jeffrey Lacker:

“The Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year.”

The beauty of figurative language is that it is open to myriad interpretations. To wit, Dennis P. Lockhart, president of the Bank of Atlanta:

“The chairman said we’ll use the patch — and use it flexibly — and some in the markets reacted as if he said ‘cold turkey.’ ”

Winter has long been a favored motif of writers to represent death and pain. Or, in the case of Minneapolis Fed President Narayana Kocherlakota, the prospect of the Federal Reserve scaling back a bond buying program:

"It's still wintry conditions. I know it feels like it should be May by now, and we should be able to take off the coat. But we well know in Minneapolis that it doesn't always happen. And you should keep your coat on when it's cold out."

And Michael Jackson, member of the board of the Miami branch of the Atlanta Fed, prefers to take us back to the comforts of childhood when describing federal stimulus:

"You can't be on the juice forever."

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Whether the Federal bond-buying program is most like a coat, a nicotine patch, a shot of booze in a punchbowl, a gas pedal, or a nice cup of juice is, like the very nature of metaphors, open to personal interpretation. What is not is Bernanke’s penchant for using symbolism instead of clear statements to illustrate the financial futre of the country.

In Dec. 2012 Bernanke popularly described the possibility of impending economic catastrophe as a “fiscal cliff.” It really caught on. A cliff is an apt way to describe the sudden end of a thing. Imagine Wile E. Coyote chasing the Roadrunner. Right off the cliff and poof! A crash. In the mine of metaphors, Bernanke had struck gold.

Except the “fiscal cliff” wasn’t apt at all. The impending increase in tax rates and decrease in spending would have had a slow, rolling effect on the economy, and not the catastrophe that a metaphor like “cliff” paints in people’s minds. It was a complex situation that required a nuanced, direct explanation. Fiscal cliff made a better sound bite than anything.

So back to the question: what’s the exact future of the bond-buying program?

There’s an answer, but it’s hard to parse because nobody is being direct. The markets, though, have their opinion. Since Bernanke first hinted the bond-buying program might end via his colorful metaphors, and analysts began interpreting those metaphors via even more metaphors, the markets recoiled.

On Bernanke’s famous “tapering” of quantitative easing comment on June 19, the following day the S&P lost 2.5 percent, the Dow 2.34, and the Nasdaq 2.28. This at the mere suggestion that the bond-buying program would cease mid-2014. The popular ETF iShares Barclays 20+ Year Treasury Bond ETF (TLT) was down 1.11 percent to $112.02, and has continued declining, currently sitting at 107.27.

A reaction to an end to the bond-buying program is inevitable. And metaphors are used for one thing: to soften the blow. Bernanke knows that an end to QE will cause a short-term panic, especially in the bond markets.

But however it’s described, there’s no getting around one thing. The bond buying program will continue, it will change, or it will end. And Bernanke knows he has to be unambiguous, lest he cause a protracted panic. Following the murkiness of his June 19 comments, Bernanke said "We are determined to be as clear as we can, and we hope that you and your listeners and the markets will all be able to follow what we're saying."

The best way to be clear is to avoid statements open to various intpretations. That is, to avoid using metaphors.

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