Mr. Bernanke can’t seem to make up his mind in deciding if it’s the season to promote the hawk or the dove when it comes to dropping hints about the future path of monetary policy. Perhaps we should blame the data. But if the economic and inflation signals lean toward volatility and random behavior these days, maybe the Fed chief should practice the now-ancient art of his predecessor: speaking in tongues. Failing that, there’s always the foolproof skill that some refer to as buttoning one’s lip.
Neither of which was in force yesterday, when Fed Chairman Bernanke spoke at Monday’s International Monetary Conference in Washington. Among the more provocative comments dispensed yesterday by the central bank head was his observation that “…inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth.”
In short, dear reader, the so-called pause in interest rate hikes, which Bernanke made a point of publicizing back on April 27, has been put on pause. Again. That is, at least until Mr. Bernanke gives another speech.
But if more attitude adjustment is approaching in the ongoing education of Ben Bernanke, the stock market wasn’t inclined to wait around yesterday and see what comes next. The S&P 500 shed a hefty 1.7% yesterday, which, by most accounts, was triggered by Ben’s latest opining. His remarks were also sufficiently pointed to move the 10-year Treasury yield back above 5.0%, after falling below that mark on Friday for the first time since May 24. And as for the recent hedged outlook for rate hikes at the June 28/29 FOMC meeting, traders of the Fed funds futures threw in the towel yesterday and decided to that another 25-basis point hike is coming, as per the selloff in the July contract.
To be fair, there’s nothing wrong with a central banker expressing concern about inflationary pressures on the march. In fact, we prefer our Fed heads to err on the side of caution when it comes to containing any future seeds of higher inflation. It’s far easier to drop interest rates to amend any hawkish error than it is to repair inflation-fighting credibility.
At the same time, consistency and prudence are worth something too when it comes to pronouncements from the mouth of the world’s most influential banker. News flash to Mr. Bernanke: the world is poring over every syllable you utter, looking for monetary clues about the future that you may or may not have intended. As such, be careful–very, very careful.
At the risk of sounding impertinent, might we suggest to Mr. Bernanke that if you’re view on inflation is evolving, shifting and otherwise running amuck, it’s time to bend over backwards and communicate that point to the capital markets, which, of course, are in the habit of setting interest rates on the long end of the yield curve.
Granted, no one knows what’s coming, not even the almighty Federal Reserve. But sometimes the future’s fuzzier than usual. This is one of those times. Trying to encourage competing visions of clarity at such moments only risks trouble down the road when and if the data deliver contradictory news, as it’s wont to do these days.
If the Fed chief continues to amend and change his tune, he risks losing credibility with the marketplace. That’s a problem, a big problem, because to date he never really established credibility, having been on the job barely more than four months. In other words, he has precious little credibility to lose at the moment.
Stability and consistency, one might argue, should be the priorities in Fed communications at the moment. That’s no easy task, to be sure, given the roller coaster that seems to define the economic news of late. But challenging or not, the Fed chairman’s task is as much about managing perceptions as it is brandishing intellectual prowess, of which Bernanke has much. It’s on the perceptions-management score, however, that he’s stumbling. Rest assured, Mr. Market won’t stand for any more slip-ups.