Fed Chief Calls His Remarks A Mistake
Wednesday, May 24, 2006
Federal Reserve Chairman Ben S. Bernanke said yesterday that he erred by talking to a TV news anchor about interest rate policy at a recent Washington dinner, making remarks that caused stock prices to plunge when they were reported a few days later.
The conversation at the White House Correspondents' Association Dinner last month "was a lapse in judgment on my part," Bernanke, who took over as Fed chief Feb. 1, told the Senate Banking Committee in a hearing yesterday. "In the future, my communications with the public and with the markets will be entirely through regular and formal channels."
In that spirit, Bernanke answered one senator's question about interest rates by referring to the Fed's last formal statement on the subject, in which central bank policymakers indicated they might raise interest rates again next month to combat inflationary pressures.
In that statement issued by Fed officials after their May 10 meeting, "we noted that there are some upside inflation risks in the economy . . . and we indicated at that time that some additional firming of policy might yet be needed in order to address those risks," Bernanke said.
The Fed raised its benchmark short-term interest rate to 5 percent at that meeting, the 16th consecutive quarter-percentage-point increase over nearly two years.
Bernanke has said he will continue the efforts of his predecessor, Alan Greenspan, to gradually make the central bank more open about its decision-making processes and better at communication.
Investors, traders and analysts have been eagerly awaiting a sign from Bernanke and his central bank colleagues about when they will finish raising interest rates. So stock and bond prices rallied April 27 when Bernanke told Congress that the Fed might pause and leave the benchmark rate unchanged at a coming meeting.
CNBC anchor Maria Bartiromo asked Bernanke the following Saturday night at the dinner whether the media and financial markets were right to think that he had signaled the Fed was done raising interest rates. "He said, flatly, no," she reported on her program at about 3:15 p.m. the following Monday, triggering a sharp drop in stock prices just before the market closed.
Bernanke did not comment on Bartiromo's report at the time. But he acknowledged yesterday that the exchange was a mistake after Sen. Jim Bunning (R-Ky.) reminded the Fed chairman: "I warned you to be careful about what you say because people are going to follow your words very closely."
Bernanke said nothing yesterday about a possible pause in interest rate increases but said the Fed's decision on whether to raise rates again at its next meeting, June 28-29, will depend on economic figures to be released between now and then. He said, "Our thinking on this will be very data-dependent."
Several Fed officials have used the same words for months, leaving financial markets jumpy as analysts guess which data will sway the decision. Stock and bond prices have swung up and down in response to changes in oil prices, retail sales, housing trends, inflation reports and other data that might affect the Fed's actions.
The Dow Jones industrial average rose to close at its highest level in six years -- just 108 points below its all-time peak -- after the Fed's May 10 statement buoyed investors' hopes that the central bank might be done raising interest rates. The Dow then bobbled over the next week before suffering its biggest point drop of the year on Wednesday, after the government reported that inflation surged in April.
Yesterday, the Dow Jones industrial average fell 26.98, to 11,098.35.
Fed policymakers say they look at a wide range of information on prices, the labor market and economic growth, as well as consumer and business surveys, financial market behavior and executives' anecdotal reports. They also pay close attention to economic forecasts produced by private firms and by the Fed staff in Washington and at the 12 regional Fed banks.
Bernanke said recently that, to him, being "data-dependent" means looking at how new information affects the forecast for the economy six or more months from now. The April inflation report, for example, matters more for what it implies for the future than for what it says about the recent past.
The problem for financial markets, however, is that Bernanke and his colleagues do not comment on how they interpret each economic report. They do not reveal the Fed staff forecasts or how they are calculated or how they are changed by new data. They do not explain how individual Fed board members and regional Fed Bank presidents produce their differing forecasts every six months.
This veil of mystery didn't matter for most of the past three years, as Fed officials provided clear public guidance about their likely next move on interest rates -- helping financial markets correctly anticipate that the benchmark rate would stay at a very low 1 percent for a year before rising slowly and steadily since June 2004.
But recently, financial markets have been more uncertain about the Fed's next moves, as have Fed officials. This has resulted in more volatility in stock and bond prices, which may continue for a while.
"We have about a month to go before the next [Fed] meeting, and a lot of data between now and then," Bernanke told the committee. "We will be watching that data very carefully."