/ 3 May 2006

Bernanke’s loose tongue sets markets wagging

Three months after succeeding the famously discreet Alan Greenspan, Federal Reserve chairperson Ben Bernanke has been dealt a painful lesson in the cost of careless talk.

A private conversation involving the new Fed chief at Saturday’s annual dinner of the White House Correspondents’ Association found its way out into public this week.

Cue frantic trading as investors dumped shares and bonds on the belief that Bernanke was backtracking on a hint made last week, that the Fed is set to call a halt to its long campaign of interest rate hikes.

Unfortunately for Bernanke, his interlocutor at the weekend’s black-tie event was Maria Bartiromo, one of the best known financial journalists in the United States.

She lost little time in relaying the gist of his remarks to her viewers on the CNBC financial news network on Monday, during a live broadcast from the floor of the Chicago Mercantile Exchange.

“I asked him whether the markets got it right after his congressional testimony and he said flatly, ‘no’,” she said, her words drowned out to a roar from traders as markets began to re-appraise Fed policy.

“I’m guessing that Bernanke is experiencing pangs of regret right now for saying anything at all,” commented Steve Stanley, chief economist at RBS Greenwich Capital.

“I’ll bet anyone a nickel that he will never do that again,” he said.

Bernanke succeeded Greenspan at the start of February, promising clearer communication from the US central bank. But too much clarity can be a bad thing, he might feel now.

Whether or not Bartiromo’s account was correct, according to Bank of Tokyo-Mitsubishi UFJ currency economist Derek Halpenny, “the story can only undermine the credibility of the Federal Reserve and its new chairman”.

In fact, during testimony to the Joint Economic Committee of Congress last Thursday, Bernanke was careful to qualify his words when he remarked that the Fed could suspend its campaign of rate hikes “at some point in the future”.

Any pause, after a long series of rate increases stretching back nearly two years, would give time for tighter borrowing costs to take effect and enable the Fed to analyse incoming data, he said.

That suggestion of an imminent pause had driven Wall Street share prices to six-year highs.

But a decision to pause “does not preclude actions at subsequent meetings”, and the Fed “will not hesitate to act” if necessary to keep inflation in check, Bernanke stressed.

In his tete-a-tete comments to the CNBC anchorwoman, Bernanke was reportedly upset at the market verdict that he had proved himself more dovish than Greenspan on inflation.

The Federal Reserve declined to comment on the report. Bernanke was to get a chance to speak for himself on Wednesday at an event in a deprived Washington suburb, before the next meeting of the Fed’s policymaking committee on May 10.

For the most part, economists and markets expect the Fed to raise its headline interest rate again next Wednesday to 5%. But there is much uncertainty about the outlook further out.

Jim Saxton, the Republican chairperson of the congressional committee, believes that Bernanke “clearly indicated that Fed policy would be data driven, and in this sense flexible”.

“In any event, I will be submitting written questions to the chairman, and expect his response will show that this controversy has been somewhat overblown,” Saxton said in a statement on Tuesday.

Andrew Busch, global currency strategist at BMO Nesbitt Burns, said the flap showed a naivete in the new Fed chairperson that contrasted with the worldly wisdom of Greenspan at the end of his 18 years in office.

“This was Mr Bernanke’s first foray into Fed policy marketing. Expect a better job in the future,” he said. – AFP