Business

Marts put Ben in a bond bind

Last week the markets made it official: All that they really care about now is the Federal Reserve.

To all market watchers, there should be no doubt that Fed chief Ben Bernanke has been and is now the primary driver of today’s financial markets. But that’s not the way it should be.

Like a petulant child, the markets stamped their feet and held their breath when the frustrated parent Bernanke talked of tapering their bond allowance in late May.

Wall Street dubbed it the June Swoon. In just a few short weeks, stocks plummeted a heart-stopping 7 percent, and bond funds suffered huge losses of close to 10 percent.

Bernanke tried to placate the markets earlier this month during a press conference, but it was not enough for the spoiled markets.

The problem is that the markets have gotten used to — or, some would say, hooked on — the twin-turbo power of zero interest rates and billions of dollars every day in bond buys by Bernanke and his Fed.

No wonder the markets cratered when the Fed hinted that the end of the QE party might have been in sight.

On Wednesday, in walking back from his taper talk, the Fed chairman called for “highly accommodative monetary policy for the foreseeable future,” and indicated the federal funds rate will remain very low for quite a long time.

That gave the markets the green light. By Thursday afternoon, equities were skyrocketing right back to the all-time-high neighborhood, and the Taper Tantrum was over.

So the markets have a bit of a mean streak for policies not to their liking. Bond vigilantes have been known to push around central banks throughout history.

The Fed would never ever admit it, but the vigilantes just drove the cost of borrowing money for the US Treasury from 1.6 percent to 2.6 percent in very short order.

In a matter of weeks, the most liquid market in the world moved to punish the US government by driving up borrowing costs $100 billion to $200 billion per year.

Lesson learned: Losing friends in the marts and in DC isn’t good for the Fed.