- The Washington Times - Tuesday, June 6, 2006

Federal Reserve Chairman Ben Bernanke has long been a big fan of central-bank transparency. In his capacity as one of academia’s most respected monetary theorists throughout much of the 1990s, it’s probably fair to say that he obsessed over it.

While his predecessor, Alan Greenspan, had a once-well-deserved reputation for speaking in Delphic tones about monetary policy and the direction of short-term interest rates — legend has it that he had to ask Andrea Mitchell three times to marry him because his first two proposals were too opaque — the fact is that Mr. Greenspan’s interest-rate pronouncements had become extraordinarily transparent throughout the final years of his tenure. As an institution, so too, had the Fed. Mr. Bernanke, who was the most loquacious junior Fed governor in history (take our word for it, we’ve read his speeches), deserves a fair share of the credit for the leaps in Fed transparency that occurred during his earlier stint as a Fed governor from 2002 to 2005. To become more transparent today, the Fed would probably have to invite C-SPAN’s cameras into its policy meetings.

So it is ironic that despite his best intentions to operate as transparently as possible, Mr. Bernanke, of all people, had the misfortune of having his views misinterpreted by the markets at the beginning of his term as chairman. Our view is that the markets deluded themselves into believing that Mr. Bernanke, in his April 27 testimony before the Joint Economic Committee, had effectively guaranteed a pause in monetary-policy tightening following the Fed’s May meeting. This, mind you, despite the emphatic assertion in his prepared remarks that the Fed “will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve’s mandated objectives.”

How much more unambiguous must he be to send the markets the message that an inflationary breakout will not be tolerated? Apparently much more so, judging by the markets’ reaction to his straightforward, unvarnished, night-follows-day remarks on Monday at the International Monetary Conference in Washington. Acting surprised by his comments, the markets tanked: The Dow Jones industrial average and the S&P; 500 shed 1.8 percent of their value, while the Nasdaq composite dropped 2.2 percent. What did Mr. Bernanke say that so ruffled the markets? “At annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months.” From a man who has repeatedly told us that his core-inflation “comfort zone” was between 1 percent and 2 percent, his conclusion — “These are unwelcome developments” — should have surprised nobody.

Nothing Mr. Bernanke said was news. These worrisome data points became known on May 17, when the Labor Department released its consumer price index report for April. Clearly, the Fed has not finished its tightening cycle. The markets, however, remained mired in self-delusion.

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