- The Washington Times - Thursday, June 15, 2006

Federal Reserve Chairman Ben Bernanke has been getting a bum rap. In recent weeks the financial media have characterized him as “blundering,” “flip-floppy,” “wobbly,” “fuzzy,” and “confusing.” But is the problem with the chairman or with the chairman’s interpreters?

On April 27, Mr. Bernanke, testifying before the Congressional Joint Economic Committee, said the Fed’s policymaking Open Market Committee (FOMC) “viewed the possibility that core inflation might rise [and that] some further policy firming may be needed.” On the other hand, he went on to say “at some point the committee 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.”

Fairly interpreted, the chairman’s remarks about a possible pause in raising target interest rates was hypothetical and conditional, not a forecast. His statement was balanced and covered both possibilities, that Fed policymakers might or might not raise interest rates further depending on economic developments. It was the kind of neutral, almost obvious, observation a student might make in a classroom.

But financial markets, in a not unprecedented schizophrenic frenzy, misinterpreted the chairman’s words to mean a pause was likely. Stocks rallied and traders smiled.

A few days later in a conversation with a TV commentator at a correspondents association dinner the chairman attempted clarification, but that too was publicized and misconstrued, again bringing indigestion to equity markets. The chairman wisely said that henceforth his statements would only be made through formal channels.

The big problem came on June 5 when Mr. Bernanke addressed a monetary conference in Washington. By that time more economic data had become available and the outlook was sharpening.

“Consumer price inflation has been elevated so far this year,” noted the chairman. “Core inflation readings … have also been higher in recent months. … These are unwelcome developments. … The Committee [FOMC] will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.”

Financial markets again overreacted to the chairman’s statement, and stock and bond prices sank. The odds shot up in the futures market that there would be no pause in raising interest rates at the next FOMC meeting in late June. The chairman was now a sharp-taloned hawk, a flip-flopper in violation of what he didn’t say on April 27, but what financial markets chose to believe he said. If markets and the media had not misinterpreted the chairman’s earlier remarks, it’s unlikely there would have been a later misperception of inconsistency.

Mr. Bernanke became chairman at a difficult time, just as the economy was approaching full capacity and thus entering the zone of greatest uncertainty for monetary policy. He believed in clear speaking, in contrast to the fabled obfuscation of his predecessor, Alan Greenspan. During his long tenure as Fed chairman, Mr. Greenspan had conditioned financial markets to his impenetrable style and markets came to trust him. Financial markets have yet to become accustomed to the present chairman’s quite different, straightforward manner. They will in time. Confidence in the new man at the helm will grow and markets will react more rationally to the chairman’s pronouncements.

Some economists and Fed watchers are saying the chairman would do well to say less. That would be a mistake. Over the longer pull, clarity and transparency in monetary policy can only have a stabilizing influence on the economy, a critical ingredient to sustained non-inflationary growth.

According to press reports, the Chicago Mercantile Exchange has created a new derivative based on the core Consumer Price Index that allows traders to bet on the data reported monthly by the government. The derivative was reportedly created largely because of heightened investor interest in inflation growing out of the Fed chairman’s recent well-publicized comments. Nongovernment economic forecasters who understand the construction and behavior of the price index are no doubt delighted.

Alfred Tella is former Georgetown University research professor of economics.

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