Bernanke Sentence Moves Market Higher

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This week has been a crucial one for the U.S. economy. Chairman Ben Bernanke testified before Congress on the Federal Reserve's exit-strategy. That is: How will officials turn the life support system off for the U.S. financial sector without destroying the system? After one of Bernanke's sentences, the Dow gained nearly 1 percentage point in a few minutes.


Let's listen now to a man whose words are often worth billions of dollars. Anything Fed Chairman Ben Bernanke says can move financial markets. And we got a powerful demonstration this week when he was before Congress. He made a seemingly obscure point while discussing a part of the Fed called the Federal Open Market Committee.

Mr. BEN BERNANKE (Chairman, Federal Reserve): The FOMC continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

INSKEEP: If you have no idea what Ben Bernanke just said, you're not alone, which is why we've brought in Adam Davidson of our Planet Money team to try to explain.

Hi, Adam.

ADAM DAVIDSON: Hey, Steve. Isn't that an exciting sentence?

INSKEEP: A very exciting sentence. But you're telling us it's worth billions of dollars. So let's just listen again before we discuss it.

Mr. BERNANKE: The FOMC continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

INSKEEP: What makes you think that sentence was worth billions of dollars this week?

DAVIDSON: I actually have proof it was worth many billions of dollars, because you can actually watch the Dow Jones Industrial Average for the moments before and after he said that sentence. And right before he said that sentence, the Dow was in a really - it was dropping and there wasn't a lot of trading going on. Clearly, everyone interested in stocks and bonds was listening for that sentence. The second he finishes that sentence, boom, it shoots up one percent.

INSKEEP: Shoots up one percent. That can be many billions of dollars.

DAVIDSON: That's many billions of dollars in a few minutes. It was a really remarkable moment, because people all over the world: money managers, investors, banks, central banks were watching that sentence and they heard exactly what they wanted to hear.

INSKEEP: What were the words that he said that so calmed people or excited people?

DAVIDSON: There were two words in that sentence that were major, major, major words. The first word was exceptionally. You heard him say that the FOMC believes that they're going to keep the key interest rate at exceptionally low levels.

INSKEEP: Mm-hmm.

DAVIDSON: So basically, for the last few months, the entire world of nerdy finance people have been obsessively studying when is Ben Bernanke going to start raising rates? They're now at the lowest level that they can be, the lowest level they've ever been. There's tremendous fear that when he starts inching those up, growth will stall, people will borrow less money, people will spend less money, and that is the obsession all over the world. And when he said exceptionally low levels, that meant he's keeping them way, way down.

The other key word, maybe more key, is extended.

INSKEEP: Mm-hmm.

DAVIDSON: He said that he's going to keep exceptionally low levels for an extended period of time. When you hear extended period of time, what does that mean to you? Do you have...

INSKEEP: Well, I guess it might be in this context, years? Is that true? Months? What?

DAVIDSON: We actually learned - it's a vague word but we learned that to the Fed it has a very precise - six months.


DAVIDSON: At least. And so by saying an extended period of time, he's signaling to everybody in the world of finance - don't worry right now, we've got a few months before we're even going to think about raising those rates again.

INSKEEP: If he meant I'm not going to change interest rates for six months, why didn't he just say that?

DAVIDSON: I mean that would be much easier for radio broadcasts. The issue is this, there's this incredible dance going on right now. It's probably the most high stakes financial dance in the history of finance. Everybody knows that at some point in the next two or three years, the Fed is going to take the global financial system off of life support - but no one knows when. If he said, yes, I'm doing it on September 12th or whatever, I'm going to start raising interest rates - that would have an immediate impact now.

People are thinking about building factories, launching new products, creating massive investment all over the world. If they hear that in September there's going to be a rise in interest rates, today, they're going to cancel those orders. That means people are laid off today, money's not spent today, the economy goes into free fall today. So by using this vague language, the dance continues a little bit longer.

INSKEEP: He leaves open the possibility that interest rates could be exceptionally low for an even more extended period of time.

DAVIDSON: Exactly.

INSKEEP: Adam Davidson with another report from Planet Money.

Adam, thanks very much.

DAVIDSON: Thank you, Steve.

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