Wall Street All Ears for Fed Chief's Big Speech

Remarks to Be First Since Credit Crunch

Tomorrow, Ben S. Bernanke will deliver the most important speech in his 19 months as the world's most powerful central banker.

In his first public comments since financial markets unraveled this month, the Federal Reserve chairman faces risks on all sides. If he seems indifferent to turmoil on Wall Street, markets could go haywire all over again. If he seems too eager to take actions to help the markets, it might encourage investors to behave irresponsibly in the future.

What he is likely to do, close watchers of Bernanke and the Fed said, is lay out his view that it is important to distinguish between prices of securities dropping and a breakdown in the markets. As Bernanke has explained in past speeches and writings, the Fed need not take action just because the prices of, say, complicated securities backed by mortgage debt have plummeted.

But the Fed does need to worry, in his view, when there is sustained panic and markets freeze up, as they did in early August, such that investors will not buy corporate debt or other assets at any price. The fear is that a credit crisis makes it difficult for sound businesses to invest or consumers to engage in day-to-day transactions.

"The chief characteristic of a financial panic is that investors lose their bearing," said Lyle Gramley, a former Fed governor who is now senior economic adviser to Stanford Washington Research Group. "They've become frightened. They don't know what to think about where things are going."

Wall Street will be scrutinizing every word for hints about whether the Fed will cut a key interest rate -- and if so, how much -- at a meeting of its policymaking committee Sept. 18. Trillions of dollars in trades hang on every comma. But Bernanke's past practice has been to deal with such questions obliquely, and Fed watchers say he is highly unlikely to lay out specific new policy steps for the central bank.

The Fed's next big move depends heavily on what happens in financial markets and the economy from now to its Sept. 18 meeting. And interpreting that information will be tricky.

The Federal Open Market Committee, which sets the central bank's policy on interest rates, typically relies heavily on a sophisticated computer model that projects where the U.S. economy is heading. Several committee members have customized versions of the model, which they use to develop their personal projections.

But such models are not terribly useful in times of financial crisis, economists say. Most of the data are weeks or months old, and in moments of turmoil, the economy tends to shift in unpredictable ways.

Fed policymakers will also be listening carefully to the presidents of the 12 regional Federal Reserve banks around the country. Each president is in frequent contact with business leaders in his or her region.

If the regional bank presidents report that their business contacts view the problems in credit markets to be confined to Wall Street, the Fed will feel little pressure to act. If, on the other hand, they report that their access to capital has been choked off or that consumer spending is slowing, that would weigh heavily as a reason for the Fed to cut the federal funds rate or take other aggressive action.

To the degree that they can use economic data to decide about a rate cut, Fed policymakers might look closely to more arcane data than that which normally shapes their decision-making.