Don’t look now but after more soothing words today from chairman Ben Bernanke, markets finally seem to be getting a grip.
In what was likely his last appearance before the House of Representatives, there was little in the way of fireworks that in the past have set markets off in a vertiginous frenzy. One congressman asked if his friend should refinance his mortgage. Bernanke responded that he wasn’t a financial adviser. Others offered encomia to his harrowing years of service. Markets reacted the way the movie-going market reacted to The Lone Ranger: they largely ignored it.
This marks something of a shift. In recent weeks, the markets have been hanging, more than usual, on every Bernanke utterance. His remarks in May to the Joint Economic Committee and other Fed communications about the possibility of scaling back the Fed’s purchase of bonds caused markets to gyrate. The reaction was particularly violent in the market for long-term government bonds. Between May 1 and July 5, the interest rate on the 10-year Treasury rose from 1.68 percent to 2.71 percent—a 61 percent increase.
But as Bernanke took pains to reassure the market, and as the stock market recovered, the panic has subsided. Traders have essentially positioned themselves for the prospect of a less accommodative Fed. In fact, as seen in the chart, the interest rate on the 10-year has fallen in the past couple weeks, from 2.71 percent on July 5 to 2.53 percent on July 16. With a glut of good, although not inspiring, economic data, volatility overall in the market has fallen as well.
As for the future, perhaps it is best to quote Bernanke’s final words to Congress today: “I don’t know.”