The Dow Jones Industrial Average slid back below the 11 000 mark in early trading on Tuesday after falling nearly 200 points on Monday, as Ben Bernanke’s baptism of fire as chairperson of the United States Federal Reserve prompted a fresh bout of jitters on Wall Street.
In less than a month, the indicator of US blue chip stocks has fallen by more than 700 points amid concerns that the man running the world’s most important central bank lacks the sure touch of his predecessor, Alan Greenspan.
Nobody said it was going to be easy for Bernanke. All the financial sages of Manhattan warned that Greenspan was a tough act to follow after more than 18 years in the Federal hot seat. Just how tough has been starkly illustrated this week.
Wall Street has been unimpressed by Bernanke’s attempts to manipulate market sentiment. He has received scant credit for trying to be more transparent in his dealings with the market — a culture shift from Greenspan’s delphic utterances.
Dealers were never quite sure what Greenspan meant, but such was his credibility that they gave him the benefit of the doubt. They assumed he knew what he was doing.
Four months into the job, Bernanke has yet to win the right to be cut some slack. In part, this has been his own fault for putting out mixed messages or seeking to correct the impression given to markets. Wall Street is still unclear about what he thinks; the difference is that they are not convinced he really knows what he is up to. Hence the market plunge following Bernanke’s comments on Monday that he was worried about inflation.
In itself, the remarks were hardly sensational. Central bankers are paid to be worried about inflation; it’s what they do. But Bernanke’s comments had come three days after US jobs data hinted strongly that the economy was running out of steam. Wall Street — responding in part to previous comments from Bernanke — allowed itself to believe the Federal Reserve would call a halt to interest-rate increases after raising the cost of borrowing at its last 16 meetings.
Bernanke appeared to put paid to that sort of talk when he said inflation had ”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-term growth”.
”Bernanke’s sense of timing leaves something to be desired,” said -Graham Turner of GFC Economics. ”Three days after the payroll report for May provided confirmation that the US economy is slowing, the new Federal Reserve chief unnecessarily upped the inflation rhetoric. Soft economic numbers are not a major problem for the stock market per se. But the threat of monetary overkill most certainly is an issue.”
The dilemma for the Federal Reserve, as for all policy-makers, is that monetary policy only works with a lag of indeterminate length. Eventually, raising interest rates has an impact on activity but it’s impossible to be precise about how long that will take. In the meantime, recent strong growth can push up inflation.
That is precisely where the US is now. As the economists at BNP Paribas put it: ”Core inflation is beginning to pick up just as the debt-soaked housing-market expansion is finally beginning to buckle under the weight of the twin drags of the substantial cumulative policy tightening of the past 18 to 24 months and record energy prices.”
Bernanke is aware of all that. He said as much in Monday’s speech, stressing that the economy was ”in transition” and monetary policy ”must be conducted with great care”. Stephen Lewis of Insinger de Beaufort said those remarks suggested a June rate rise was by no means a done deal. But markets are not sure what to think. And that’s the problem. — Â