Today's NFP number, and how careless economic talk costs lives

Among a list of cliched complaints about politicians and central bankers - "why can't they just work together?", "shouldn't they just do the right thing?" - one that really jars is the classic "politicians should talk less and do more". The focus of markets on today's US nonfarm payrolls shows that words do have powerful effects.

Fed chair Ben Bernanke recently warned that QE tapering could occur if macroeconomic data improves. We have no idea of the scale of the withdrawal being considered, or the timeline, just that it could happen. That's panicked markets and we've seen some pretty dramatic reactions (most notably in Asian stocks, where Japan's Nikkei 225 has seen its biggest fall in a week since Fukushima).

This communication, whether Bernanke intended it or not, has meant that all eyes are now on today's nonfarm payrolls. No other macroeconomic release seems to matter today. A good beat could signify that QE could wind down, and a lot of people are very worried about what this could mean.

Most policymakers are acutely aware of the impact of how they word their announcements. Just watch European Central Bank president Mario Draghi. During the height of the currency wars saga, his comments seemed very deliberate, and had strong ramifications for the euro.

Troublingly, this sort of talk tends to result in a lot of volatility, particularly when statements aren't clear. Bernanke's remarks have been interpreted and re-interpreted, and we're still not at all sure what the plans are. Economist Lars Christensen:

Hence, what we are seeing now is that US monetary conditions are being tightened even before the fed has scaled back asset purchases. What is at work is the Chuck Norris effect. It is the threat of “tapering” that causes US stock markets to decline. Said in another way Ben Bernanke has over the past two weeks effectively tightened monetary conditions.


The heightened volatility we have seen in the US stocks markets over the last two weeks is mostly the result of monetary policy failure – a failure to formulate a clear target, a failure to be clear on the policy instrument and a failure of making it clear how to implement monetary policy.

(Market Monetarist)