If you think financial markets have been chaotic lately, then Ben Bernanke has just one thing to say to you: You're welcome.
The Federal Reserve Chairman on Wednesday responded to criticisms that the Fed had caused turmoil in financial markets by warning investors of its plans to slow down its extraordinary stimulus measures later this year. Bernanke said the Fed had done us all a favor, actually, by preventing the buildup of a dangerous market bubble.
"I would suggest that, notwithstanding some volatility we've seen in the last six weeks, that speaking now and explaining what we're doing may have avoided a much more difficult situation at another time," Bernanke said in a question-and-answer session after a speech at the National Bureau of Economic Research.
The Fed has been buying $85 billion worth of Treasury and mortgage bonds every month to help keep interest rates low and stimulate growth, a steroid regimen known as "quantitative easing." Last month, Bernanke suggested that the Fed might start to dial back those bond purchases a bit in September. Financial markets proceeded to freak out entirely, sending stock and bond prices lower and causing the biggest single jump in interest rates in decades.
The rise in rates has been so violent that Bernanke admitted on Wednesday it had created a potential headwind for the economy. That was still preferable, he suggested, to the trouble the economy might have faced had the Fed chosen not to reveal its plans to taper bond purchases.
"Suppose we had said nothing and time had passed and market perceptions had drifted away from our own perceptions," he said. "During that time, it's very likely that more highly levered risk-taking positions might build up, reflecting some expectation of an infinite asset-purchase program."
Fed critics often accuse the central bank of letting dangerous speculative bubbles inflate all over the world with its money-printing. The Fed has acknowledged that it's aware of the dangers, and Bernanke himself has spoken recently of the need for central bankers to keep an eye on developing bubbles. The Fed seems to think its QE program might not be worth the risks any more, which may be one reason it's eager to dial it back.
Bernanke still sees many weaknesses in the economy, however -- including the damage he has done by roiling financial markets and causing interest rates to rise. So he promised again on Wednesday to keep the Fed's conventional policy tool, short-term interest rates, pegged to zero for probably years to come. And QE is not going away entirely for several more months, at least.
Bernanke's promise of much more easy money sparked a rally in the stock market, which has been one of the main beneficiaries of easy Fed policy. In other words, Bernanke may have averted one bubble, but the Fed's critics will still have plenty of cause to warn of more bubbles to come.
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