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Monday, May 01, 2006

Fed Watch: The Honeymoon is Over

Tim Duy interprets the latest Fed Speak:

The Honeymoon is Over, by Tim Duy: Note to Fed Chairman Ben Bernanke: Market participants do not need this kind of grief.  The financial wires are reporting versions of the following from the WSJ:

Stocks turned lower, though, in the final hour of trading after Maria Bartiromo, a commentator on financial news network CNBC, said Federal Reserve Chairman Ben Bernanke told her over the weekend that the media misinterpreted his comments in Congressional testimony last week as too lenient against inflation. Ms. Bartiromo said Mr. Bernanke told her that it was "worrisome" that the market would interpret his comments as too dovish.

Or, the quote from Bloomberg:

''I asked him whether the markets got it right after his Congressional testimony and he said, flatly, no,'' anchor Maria Bartiromo said. ''He said he and his Federal Open Market Committee members were basically trying to create some flexibility for the Federal Reserve, saying the Fed may pause but the data will really dictate whether more rate hikes will occur.''

Recall that Bernanke’s testimony last week was widely interpreted to imply that the FOMC is interested in pausing in the not so distant future, specifically identifying the possibility of pausing even if risks remain unbalanced. Apparently, Bernanke doesn’t like this interpretation of his comments, perhaps because it seemed to guarantee a pause at 5%. Instead, the FOMC wants flexibility, not guarantees. Which creates a whole lot of uncertainty for the rest of us.

Meanwhile, while the Dow was giving up its gains for the day and bonds were extending their losses, Atlanta Fed President Jack Guynn managed to sound like he wasn’t all that unhappy with the widely accepted interpretation of recent Fedspeak:

If - and I emphasize if - my most likely forecast of sustainable output growth and modest inflation is right, then I am of the view that we are very close to having Fed policy properly calibrated for now

Guynn appears to feel, that given the current flow of data, a pause is in the near future. Is he at odds with Bernanke? Or did he not get the memo from Bernanke that market participants had missed the mark last week? Or…?

I will stick largely to my previous interpretation of Fed policy. The FOMC would like the opportunity to pause; they do not want to keep blindly raising rates. They expect previous tightening to help pull the economy back to potential before inflationary pressures set in. The path of future policy depends upon their revisions of that forecast. If incoming data triggers a revision of that forecast, then the path of policy will change accordingly. No rate hikes are guaranteed. No pause is guaranteed either.

This all sounds good on paper. In practice, it is getting ugly. Bernanke is having a difficult time communicating policy. It is apparently difficult to determine the Fed’s interpretation of the incoming data. After all, Bernanke gave his testimony AFTER an unexpected jump in core CPI and a rise in oil prices to $75 a barrel. That would naturally lead one to take a dovish view of Bernanke’s comments. Indeed, even Guynn appears to have taken a dovish view.

If the FOMC in fact is reevaluating its inflation forecast for the back half of this year – and I wouldn’t blame them – they need to communicate that new information. Or, at the very least, do not reiterate the Guynn comments above.

Bottom line:  It looks like the Fed needs to work on its communication strategy. Interestingly, early reports on Bernanke praised his clarity compared to Greenspan. Doesn’t quite seem so clear today.

Update (MT): Link to Guynn speech: Nearing a Sustainable Balance of Economic Growth.
Update (MT): Video of Bartiromo's remarks. (Thanks CR, who comments here).

Update (MT) from Bloomberg:

Bernanke Gets a Crash Course in Leadership After Dinner Remark, Bloomberg: Federal Reserve Chairman Ben S. Bernanke is getting a crash course in what it means to be the head of the world's most powerful central bank.

Financial markets were blindsided yesterday after CNBC anchor Maria Bartiromo reported that Bernanke told her investors were wrong in thinking he's done lifting interest rates. ... It isn't clear exactly what Bernanke said; a Fed spokeswoman declined any comment. What is clear, Fed watchers say, is that Bernanke underestimated the scrutiny that anything he says, even in a social situation, will receive now that he's chairman.

''The management of communication here and the way things were said has, I think, undermined a little bit of Fed credibility for now.'' said John Ryding, chief U.S. economist at Bear Stearns Cos. in New York. ...

Richard Franulovich, a currency strategist at Westpac Banking Corp. in New York [said] ''Bernanke is still easing his way into the role and learning what he can and can't say, and to whom. He won't be speaking off the cuff to media people again. He's probably learned a lesson.'' ...

The report was unusual because most remarks by Fed chairmen are broadcast live by several television networks, delivered in speeches or in testimony to lawmakers, said Neal Soss, chief economist at Credit Suisse Holdings in New York, who once worked as an aide to former Fed Chairman Paul Volcker. Such events are generally scheduled at least a week in advance, allowing investors to prepare for them.

Bernanke isn't the first Fed chairman to learn the hard way that his words carry far greater import than before.

Shortly after taking over the reins at the Fed in August 1987, Alan Greenspan appeared on ABC's ''This Week with David Brinkley'' program and suggested that inflation could become a problem if consumers and companies thought that it was inevitable. Bond yields rose and stocks fell in response, and Greenspan never gave another television interview on the economy. ...

    Posted by on Monday, May 1, 2006 at 04:50 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (13)


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