Bernanke States the Obvious About Interest Rate Hikes, Wall Street Flinches

Although the federal government is closed due to snow, Fed Chairman Ben Bernanke decided not to wait for today’s congressional hearing to be rescheduled to release his statement. In it, he pointed out something exceedingly obvious: The Fed’s actions to keep short-term interest rates at zero are going to have to end at some point.

“Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” he wrote.

Markets reacted as though the news that interest rates won’t stay at nearly zero forever was shocking — and as though “at some point” might come tomorrow. The Dow dropped 40 points in the 90 minutes after Bernanke’s 10-page statement was released. The best explanation of why everyone freaked out came from someone who himself swore he wasn’t freaking out.

“Saying it will raise rates ‘before long,’ obviously there’s no specifics but it does put potential rate increases back on investors’ minds,” said Alan Lancz, president of Alan B. Lancz & Associates. “Before, it was considered not in the foreseeable future.”

In other words, the people to whom Americans with 401k’s, Roth IRAs and other retirement accounts are entrusting their non-foreseeable futures were unable to conceive of a point in the near term at which the Fed would return interest rates to something approaching historical norms, and have been investing your money as though the crisis would last forever.

No wonder Chase CEO Jamie Dimon expects a financial crisis every five to seven years.