- The Washington Times - Tuesday, May 2, 2006

Without any help from Federal Reserve Chairman Ben Bernanke, the media and the markets are perfectly capable of deluding themselves into believing whatever they want to believe, irrespective of the obvious fantasy. From January 1999 to March 2000, for example, the media and markets were deluding themselves into believing that “the fundamentals” justified the doubling of the Nasdaq, which increased from less than 2,500 in January 1999 (that was nearly double its value when then-Fed Chairman Alan Greenspan warned about “irrational exuberance” in December 1996) to more than 5,000 in March 2000. That took an awful lot of credulity.

All of this brings us to the “lesson in Washington politics” that the supposedly “still a bit wet behind the ears” Fed chairman learned the other day, according to the Observer in the Financial Times. At Saturday’s White House correspondents’ dinner, it seems that Mr. Bernanke told CNBC’s Maria Bartiromo that the media and markets had misinterpreted his Thursday congressional testimony if they believed that the Fed intended to stop raising short-term interest rates after its next meeting. On Monday afternoon, when CNBC’s Bartiromo reported her Saturday conversation with Mr. Bernanke, the Dow instantaneously dropped about 80 points. Mr. Bernanke’s remarks were deemed to be “incautious.”

Now, it is a very safe bet that Mr. Bernanke did not take the Fed chairman’s job with the intention of cavalierly throwing away a quarter-century of the Fed’s hard-earned inflation-fighting credibility achieved by Paul Volcker and Mr. Greenspan. Moreover, Mr. Bernanke earned his renowned reputation by vigorously arguing for more central bank transparency, not less. In fact, during the four years (2002-05) he served as a Fed governor, he set the all-time intercontinental record among all junior central bank governors for giving speeches explaining the Fed’s role and its options. As to what the Fed might do in the future, Mr. Bernanke could not have been more clear during his congressional testimony.

In his prepared remarks, which should have left no doubt about the thought that went into them, Mr. Bernanke did acknowledge that the Fed “may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook.” That apparently was the part of his testimony that the media and markets chose to believe. However, he then immediately, and very explicitly, warned that the tightening cycle may not end after a pause. “Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings; and 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.”

Self-delusion, it appears, remains in inexhaustible supply.

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