Tread carefully, says the Fed Head March 24, 2006 The new game in town is trying to outguess Ben Bernanke. It's the same game that was played last year, and the year before, and before that... only then it was called Outguess Alan Greenspan.
I got a real chuckle from an article in Wednesday's Wall Street Journal; it was so good, I just have to quote a bit from it:
"Congratulations to new Federal Reserve Chairman Ben Bernanke, who addressed the Economic Club of New York Monday and managed to confuse the financial press about monetary policy more thoroughly than even Alan Greenspan used to.
"Yesterday's papers contained acres of analysis suggesting that Mr. Bernanke had said that the current low long-term bond yields could be caused by any number of factors that could lead to either higher (or lower) short-term interest rates, and in any event meant that central bankers had to be flexible and rely on all sorts of economic indicators rather than get pinned down by one or two. Or something like that. With remarks of such studied opacity, Mr. Bernanke is well on his way to joining the central banker hall of fame."
I sometimes read the speeches of Fed Chiefs, but not on a regular basis since most of what is relevant can be surmised from the press. However, with this kind of press I just had to go find Ben Bernanke's speech and read it for myself.
Reading transcripts of economic speeches at 9 PM on a Thursday night is not something I wish on my enemies, so I certainly won't subject you to it. But I must say, the Journal journalist had it all wrong. Bernanke's speech was clear, informative and very interesting.
I think the reason why the financial press is becoming more and more confused is because they are less and less able to think for themselves. It seems nowadays everybody is just waiting for somebody else to tell them what to do, what to think, what to eat, how to dress and what they can, and cannot say. If the press was waiting for Bernanke to make them feel smart by giving them throw-away lines they can impress their editors with, I can understand their disappointment.
What the press, and it seems most of the financial community, did take away from Monday's speech was that more interest rate hikes are likely. That may be so, but I think what was really important in Ben Bernanke's speech was that he made it perfectly clear that the current economic situation is not perfectly clear at all. His talk was centered on the flattening of the yield curve and the potential inversion of same, and what that means. As I said, I will not burden you with the gory economic details of his speech, but I will note a few things.
Instead of telling the world why the yield curve is flat, what it means for the near and long term future of the US, and the world, or what he is going to do about it, Ben Bernanke examined several possible causes that were sometimes conflicting and sometime not. It was obvious that he considered the risk to the economy to be low and that he favored explanations that implied the US economy was doing well and was expected to continue to do well. From this, and other comments he made, it could be deduced that he is likely to be in favor of raising the overnight rate another notch or two -- hence the reaction in the market and the conclusions in the press.
What the press did not tell you is that the whole presentation was laid out flawlessly to show that interpreting current economic conditions is not a simple matter and is open to several different interpretations that all have some modicum of validity. It is only with hindsight that we will know for sure but hindsight is not a luxury that the Fed Chief has. The most important aspect of his talk, in my opinion, was the message that economic data and conditions are at best ambiguous, and that makes life difficult for policy makers. According to Bernanke "... policymakers are well advised to follow two principles familiar to navigators throughout the ages: First, determine your position frequently. Second, use as many guides or landmarks as are available."
He is emphatically telling us that the future is not clear and that policy could change rapidly with changing information and conditions. Have I not warned for some time that volatility is going to increase?
After reading the entire text of Bernanke's speech I found myself thinking that this is an intelligent, level-headed and clear-thinking man. Of course, a few decades as Federal Reserve Chairman can fix that.
Paul van Eeden
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