By David Ignatius
Friday, May 5, 2006
Alan Greenspan was often accused of being incomprehensible in his public utterances. "If you understood what I said, I must have misspoken," he famously told a senator once. Yet in private, Greenspan communicated so clearly through a network of invisible intermediaries that his actions rarely surprised the financial markets.
Now the world economy is adjusting to an apprentice maestro in Ben Bernanke, and the wires are getting crossed. The new Fed chairman is communicating too bluntly in public and too opaquely on the hidden channels that steady the markets. It took Greenspan years to perfect his weird combination of opacity and clarity, but the financial world will be unhappy if Bernanke doesn't quickly learn the art of indirect communication.
Bernanke's maiden missteps involved the most powerful weapon in his arsenal -- a Fed chairman's ability to shape expectations about future interest rates. Traders are paying special attention now because this is a moment when nearly all the major markets -- currencies, stocks, bonds, commodities -- seem near delicate inflection points. Their future course depends in part on signals sent by the new Fed chairman.
The cat-and-mouse game with the markets began with the March 28 meeting of the Federal Open Market Committee. It was the first time Bernanke had presided over the Fed's rate-setting body, and some traders expected he might signal an intention to ease Greenspan's methodical tightening, which had featured 14 quarter-point raises in the federal funds rate since June 2004. But Bernanke moved up another quarter point, and the communique suggested that rates might go higher still to contain inflation. Traders who had bet on a future pause were caught wrong-footed.
But wait a moment. When the minutes of the March 28 meeting were released two weeks later, they suggested that Bernanke was indeed thinking of a pause: "Most members thought the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much." Now traders who had bet on continued tightening were scrambling to adjust their positions.
The expectation of an imminent pause was reinforced by Bernanke's April 27 congressional testimony, when he said (with what he must have hoped was Greenspanian obscurity), "at some point in the future, the [Fed] may decide to take no action at one or more meetings." He cautioned that he might resume tightening, but the markets focused on the "no action" part, and traders around the world adjusted their portfolios yet again.
Then the new Fed chairman did something dumb. He spoke plainly, in public. At last weekend's White House Correspondents' Association dinner, he was buttonholed by CNBC's Maria Bartiromo. "I asked him whether the markets got it right after his congressional testimony, and he said, flatly, no," she reported later. "He said he and his Federal Open Market Committee were basically trying to create some flexibility for the Federal Reserve, saying the Fed may pause but the data will really dictate whether more rate hikes will occur."
Bernanke's comment was entirely reasonable, but it created an uproar -- and caused the bond market to reverse course once more. "It is getting ugly. Bernanke is having a difficult time communicating policy," wrote Tim Duy in his blog, Economist's View. The Financial Times scolded the new chairman's "unfortunate" communications gaffe and suggested he move to a more rigid inflation-targeting model for setting rates, in which his comments, public or private, wouldn't be so important.
Bernanke came to the Fed as an advocate of greater transparency, arguing for more public statements, news conferences and forecasts. I suspect he may be losing a bit of his enthusiasm for openness as he discovers just how closely (and often foolishly) the markets hang on a Fed chairman's words. The danger (as his comment to Bartiromo suggested) is that the markets adjust so quickly to what they think the Fed is doing that they leave the chairman little flexibility. Once the traders are convinced he's doing "x," he may have to do "2x" to achieve the desired result. Thus the value of Greenspan's public mumble -- it created just enough ambiguity to give him room to maneuver.
Today the markets should be focusing on the macro questions. Are global financial imbalances finally being resolved, through slower U.S. consumption and a falling dollar? Are the Chinese finally going to consume more and export less, with a higher yuan? Is the U.S. stock market poised for a sharp rise or a tumble? The answers to those big questions are unknowable, alas, so it's no surprise that the markets focus instead on what the Fed chairman said, or might have said, or shouldn't have said. Bernanke is the latest to discover that, in communications, less is sometimes more.