Some on Wall Street think Ben Bernanke has a communication problem. They say he gives mixed messages about the economy and about the Federal Reserve’s intentions, leaving investors confused.
But they’re missing the point — the recent economic data isn’t so clear cut either. And consider the alternative if he becomes tightlipped: There won’t be any clues about where interest rates could go next.
There is no doubt that Bernanke has gotten off to a bumpy start since taking the Fed’s helm on Feb. 1 from the retiring Alan Greenspan. As some economists have put it, he is a rookie making rookie mistakes.
Much of that comes from what was expected from Bernanke, and how he has delivered.
While Greenspan was known for being evasive and often difficult to decipher, he and other Fed policy-makers did significantly increase what they would discuss publicly during the latter half of his 18 years of leadership.
Bernanke, in turn, has long advocated transparency in the Fed’s communication to improve signals about whether central bankers are leaning toward increasing, reducing or leaving borrowing costs unchanged. Lately, all the action has been to the upside: The Fed has boosted the overnight bank lending rate to 5 percent in 16 quarter-point steps since June 2004 to slow the economy and keep inflation in check. Its policymaking panel next meets on June 28-29.
Upon Bernanke’s arrival at the Fed, financial markets welcomed the idea of a plain-speaking, straight-shooter. But now they are thinking they’ve gotten more than they asked for.
It all started on April 27, when Bernanke testified before Congress that “at some point in the future, the committee may decide to take no action at one or more meetings.” Investors’ translation: The Fed may stop raising rates at the June meeting.
Stocks rallied, but the gains didn’t last for long. The following Monday, financial markets were hit hard when CNBC reporter Maria Bartiromo disclosed that the Fed chairman told her at Washington dinner the previous Saturday night that his congressional testimony had been misunderstood.
The flip-flopping didn’t stop there. The Fed issued a statement on May 10 saying that “inflation expectations remain contained.” But many investors disagreed, especially after April’s core inflation reading released on May 17 showed that prices accelerated to a brisk 3 percent annual rate even after higher food and energy costs were excluded. Then on May 24, Bernanke said that inflation expectations were “well contained,” which market participants viewed as dovish.
On June 5, Bernanke seemed to have changed his tune again when he talked publicly in a speech about the danger of rising inflation. The result was ugly: Stocks plunged on the news, with the Dow Jones industrial average losing almost 250 points in two days.
Then a few days later, stocks rose sharply after Bernanke said record energy and commodity prices could account for some of the recent uptick in core prices but that inflation expectations have remained within historical ranges.
“Ben Bernanke is trying to improve Fed transparency by being more plainspoken than former Fed Chairman Greenspan,” said Morgan Stanley economist Richard Berner. “But even the most finely crafted and straightforward language can leave room for misinterpretation.”
Maybe market-players should consider what Bernanke is up against: A cloudy economic picture with what looks to be slowing growth and rising inflationary pressures. Usually, the Fed raises interest rates to tame inflation, but we’ve reached a point where policy-makers have to avoid tipping the economy into a recession by boosting rates too much.
It isn’t an easy fix, and the way he’s been talking “reflects the true uncertainty about the future course of the economy and policy, and thus the increasingly complicated policy choices the Fed faces,” said Lehman Brothers U.S. economist Ethan Harris. “It is hard to sound transparent when the message is ’we don’t know’.”
Still, Bernanke could use some fine-tuning in his execution, and he knows it. He has tapped vice chairman designate Donald Kohn to study how the Fed communicates with financial markets.
Investors, at the same time, could use a little patience. Beating up Bernanke seems like the thing to do right now because he isn’t saying what they want to hear and they hate his delivery. But it is going to take time for him to better hone his message and for markets to understand his way of speaking.
The important part is that he is willing to talk. No one should want that to change.