At big-ticket dinners, a blunt Bernanke sounds theme of low rates
By Jonathan Spicer and Svea Herbst-Bayliss
NEW YORK/BOSTON (Reuters) - In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance.
Bernanke, who retired from the U.S. central bank in January, has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession.
The accounts of the discussions come from attendees as well as those who heard second-hand what was said at the dinners, where hedge fund managers and others willing to foot the roughly $250,000 bill for each event asked the former Fed chairman questions in a free-flowing round-table fashion over recent weeks.
Bernanke has no constraints on expressing his views in public or private, providing he does not talk about confidential Fed matters. He declined to comment on any of his remarks at the private events.
The demand for Bernanke's time shows that many of Wall Street's highest-profile brokers and investors see him as holding rare insight on how the Fed will react in the months and years ahead - and are prepared to pay big bucks to get private access to those views.
At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said.
Under his direction, the Fed took the fed funds rate, its key policy lever, to near zero in late 2008 as the financial crisis raged. The central bank has held it there ever since in a bid to stimulate a stronger rebound in the world's largest economy.
Another dinner guest was moved when Bernanke said the Fed aims to hit its 2 percent inflation target at all times, and that it is not necessarily a ceiling.
"Shocking when he said this," the guest scribbled in his notes. "Is that really true?" he scribbled at another point, according to the notes reviewed by Reuters.
The sources requested anonymity because the dinners were private and they were not authorized to discuss the material publicly.
The Washington Speakers Bureau, which organizes the events and advertises the former chairman's availability on its website, did not return calls.
AFTER THE FED
Since leaving the Fed at the end of January after serving eight years as chairman, Bernanke has taken a position as a distinguished fellow at the Brookings Institution, a think tank in Washington.
He kept a low profile for the first month after his departure, delivering his first public remarks to a banking conference in Abu Dhabi on March 4 and earning a $250,000 speaker's fee. His annual paycheck from the Fed was $199,700 last year - an amount that he would have already exceeded many times over from the fees he has earned in the past couple of months.
By contrast, his predecessor at the Fed, Alan Greenspan, waited only a week after his departure before addressing a private dinner hosted by Lehman Brothers, the investment bank whose collapse in 2008 sent the financial crisis into high gear.
That also brought in a reported $250,000, while a private telechat with investors in Japan that same day in 2006 was worth about half of that, each drawing criticism for giving high-paying investors a leg up on others who didn't have access to Greenspan.
Bernanke's private dinners began near the end of March, roughly two months after his retirement.
"It's not atypical for what other former Washington big shots do," said Jan Baran, a partner and head of the election law and government ethics group at law firm Wiley Rein LLP.
"He's being paid ... for sharing his wisdom and predictions, and presumably not to exert his influence on the Fed," he added. This will go on "until he's proven to not be all that clairvoyant."
TIES WITH YELLEN
The baseline fee for a private get together is $250,000, and more if Bernanke needs to travel from his home in Washington, though the price has dropped some as he has done more events, the sources said. The size of that decline could not be immediately learned.
He is known to be close with his successor, Janet Yellen, adding to perceptions that he should know what the thinking is at the Fed months after his departure. It is a particularly sensitive time as Yellen works to reverse the biggest monetary stimulus experiment ever - and investors who understand how the Fed is going to proceed have an advantage over those who don't.
Hedge fund attendees have included Paul Tudor Jones of Tudor Investment Corp and David Einhorn of Greenlight Capital. Others have included Michael Novogratz of Fortress Investment Group, and Larry Robbins of Glenview Capital, as previously reported in other media. All declined to comment to Reuters.
David Tepper, the hedge fund manager who earned $3.5 billion in 2013 to rank as the industry's best paid investor, said at an industry conference this week that he attended the first private dinner and peppered Bernanke with questions. But Tepper said he didn't make the best use of the information, a lapse he now regrets. "I screwed up that trade," he said.
At the same conference, Novogratz from Fortress said many hedge funds that bet on big interest rate and currency movements missed a hint from Bernanke at the dinner and failed to buy long duration Treasuries.
Bernanke's last major act as Fed chairman was to announce, in December, plans for the winding down of the central bank's huge stimulus, a bond-buying program called "quantitative easing," which should end by this fall.
That was greeted by a sell-off in the bond market, where expectations for future interest rate levels are particularly important, because many investors believed the Fed would move on to raising interest rates in fairly short order. The yield on the benchmark 10-year Treasury note ended the year just above 3 percent, the highest since the summer of 2011.
To the surprise of many, however, bonds have rallied back hard this year, driving the 10-year yield down by half a percentage point. The shift comes as more and more investors come to embrace a view Bernanke has been sharing with his dinner guests: There is just too much slack remaining in the economy to support a rise in interest rates.
Still, not every guest believes they came away from a Bernanke dinner with an exclusive insight.
"People can try all they want to feel that they got him to say something extra to them, but he never does," said one person who attended one of the dinners.
"WE" THE FED
Financial institutions, including JPMorgan Chase & Co (JPM.N) and institutional brokerage BTIG, have hosted at least four Bernanke dinners for their clients since March, the sources said. Venues included Manhattan's Eleven Madison Park and Le Bernardin, where the four-course prix fixe menu is $135 a plate. More are expected, the sources said.
JPMorgan and BTIG declined to comment.
The investors have asked Bernanke about everything from how the Fed will shrink its $4.3 trillion balance sheet to why exactly it didn't start to cut bond purchases last September, when expectations were high.
By most accounts, Bernanke has been candid and sometimes feisty, defending his eight-year record of steering the U.S. economy through the deepest recession in decades. Often using the pronoun "we" to describe the Fed, he has been careful not to contradict Yellen's public comments, in which she too has stressed that the labor market is far from fully healed.
In its first policy statement under Yellen, in March, the central bank said the federal funds rate may need to stay below average even after it reaches its goals for employment and inflation.
In one dinner-table exchange with investors, Bernanke argued that fiscal tightening, constrained financial markets and lower U.S. productivity all point to lower real rates than would be considered normal for a long time to come.
Based on trading in the massive Eurodollar futures market, investors have in recent months tempered expectations of rate rises in the years ahead; as it stands, they don't expect the fed funds rate to return to 4 percent until 2022. As recently as last September, futures markets signaled they thought this would happen by the end of 2018.
At the dinners, Bernanke has also argued the Fed would want to delay raising rates if the tighter financial conditions created could threaten to harm the economy. He has also stressed that financial stability concerns would more formally be considered in policy-making, according to the sources.
For hedge fund managers who have big bets riding on when exactly the Fed will raise rates, dining with Bernanke is part ego and part professional necessity.
The average U.S. hedge fund has returned only 0.9 percent in the first four months of the year after two consecutive months of losses in March and April, leaving many top managers on edge.
(Additional reporting by Jennifer Ablan in New York; Editing by Dan Burns and Martin Howell)