Bernanke's speech: Hawkish comments on 'irrational exuberance' for 2008

Yesterday, Fed Chairman Ben Bernanke gave a speech at the Federal Reserve Bank of Boston's 52nd Annual Economic Conference in Chatham, Massachusetts. In his speech, he said, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation."

The equity market dropped this morning as a result. Many traders interpreted these comments quite hawkishly, assuming that the Chairman was implying that interest rates may be raised as early as the end of this year. But as I have stated previously in my book, Follow the Fed to Investment Success, "Watch what the Fed does, not what it says."

This speech reminds me of the famous "irrational exuberance" speech by then Chairman Alan Greenspan in late 1996. Greenspan said that "irrational exuberance" had caused the equity markets to reach unsustainably high levels. Many then interpreted these comments quite hawkishly and assumed that the Fed would be raising rates shortly.

However, the Fed did not raise rates until several years later. Economic events, such as the debt crisis in the emerging markets and Russia, prevented the Fed from taking action, and the U.S. equity markets continued to rise. The bear market in the S&P 500 finally did occur in 2000, almost five years later.