“It’s worrisome that people would look at me as dovish and not necessarily an aggressive inflation-fighter,” Ben Bernanke reportedly said on Saturday to CNBC’s Maria Bartiromo, as she recounted via LATimes.com.
Bartiromo yesterday said she talked with the Fed chairman over the weekend at the annual White House correspondents’ dinner, where she engaged the head of monetary policy on the matter of whether “the markets and the media [got] it right last week in terms of its reaction to your congressional testimony,” the CNBC correspondent explained on Monday. Bernanke insisted that his aim was only to allow the Fed some “flexibility” in its management of the nation’s money supply.
But if Bernanke intends to be the voice of persuasion in proving his hawkish mettle, he still has his work cut out for him. Indeed, there’s a thin line between espousing the value of flexibility and being seen as dovish in Mr. Market’s mind these days.
The next big chance for enhancing or diminishing Bernanke’s newly acquired dovish patina comes next week, on May 10, when the Fed’s FOMC convenes to consider interest rates again. To raise or not to raise will be the question, of course, although the futures markets is betting that another 25-basis-point hike is in the offing. But this time the stakes will be higher than with past rate hikes, which have been coming steadily in 25-basis-point increments since June 2004.
The Fed funds rate currently stands at 4.75%, and very likely will rise to 5.0%. But the current debate and uncertainty about the next move in June ill serves Bernanke’s efforts to project an image of a steady, confident hand. The handover of the central bank from Greenspan, in other words, is foundering to judge by comparitive perceptions between the current and former Fed chiefs. To be sure, there’s ample opportunity to keep the still-nascent stumbling from detiorating further, but the margin for error is getting thinner by the day.
The yield on the 10-year Treasury Note continues pushing higher, and the stock market arguably is turning skittish. In fact, yesterday’s sharp and sudden selloff in the S&P 500 late yesterday has been attributed to news of Bernanke’s Saturday evening confession. Mr. Market’s forgiving mood is evaporating quickly.
In any case, whatever the FOMC decides on May 10 will cast reverberations further and louder than in past FOMC meetings. If another rate hike comes, it may raise expectations that more are imminent, driving home predictions that the era of cheap money really, truly is ending. If so, that raises the possibility of elevating all the attendant effects that typically come with a repricing of risk–a repricing process that’s been notably soft in the recent past but may be on the verge of a quick return. Alternatively, if the FOMC surprises and holds rates steady, it’s likely that bond market would finally rise up in anger with a sharp selloff in reaction to having been snookered. The bond ghouls of yore, in sum, may due for a return engagement after a lengthy sabbatical.
Meanwhile, Bernanke seems to have set himself up for some unwanted attention, courtesy of last week’s coy remarks that the central bank might pause in nearly two-year odyssey of elevating the price of money. It’s hard to imagine the Maestro getting himself hoisted by his own petard in this fashion. With the benefit of hindsight, it’s clear that that Bernanke sent the wrong message at this point in the cycle. Yes, in theory, maintaining flexibility for crafting monetary policy has its merits. But running the Fed isn’t about theory so much as putting ideas into action while minimizing any potential for market and economic fallout. Indeed, there are more than a few bits of conflicting reports about the future for economic growth and inflation, and the last thing Mr. Market needs is tortuous statements from the Fed chief about what comes next for rate hikes.
Yesterday’s batch of economic reports only heightens the anxiety with stronger-than-expected growth updates, thereby undermining the Fed chief’s embrace of the flexibility concept last week. Consider the smoking guns:
* Personal income rose by sharply by 0.8% in March, up from 0.3% in February
* Ditto for personal spending, which climbed by 0.6% in March, up from 0.2% previously
* In a sign of continued strength, March construction spending jumped a robust 0.9%, following February’s 1.0% climb.
* The ISM Manufacturing Index rose to 57.3 for April, up from 55.2 in March, reflecting increasing strength in the sector.
“Clearly, the economy is holding onto all of the momentum it displayed in late 2005 and early 2006,” writes David Resler, chief economist at Nomura Securities in New York, in a note sent to clients yesterday.
Similarly upbeat comments can be heard from Ed Yardeni, chief investment strategist at Oak Associates. “I am raising the odds of a better-than-expected economic growth scenario for this year, with the Fed continuing to raise interest rates,” he writes in an email to clients this morning. “The latest batch of economic indicators for employment, income, consumer spending, housing, capital goods orders, and inventories is remarkably robust.”
Mr. Bernanke, it seems, will have to redouble his efforts to fend off his dovish imagery he recently and inadvertently acquired. Flexibility is out for the moment, and projecting confidence is in. It’s all about perception, of course. But ultimately, that’s the biggest stick in any central bank’s arsenal, and a stick that Bernanke can’t afford to drop.
© 2006 by James Picerno. All rights reserved.