Business presses Bernanke for clearer signals
Business presses Bernanke for clearer signals
By Krishna Guha in Washington
Copyright The Financial Times Limited 2006
Published: June 29 2006 03:00 | Last updated: June 29 2006 03:00
The influential US Chamber of Commerce on Wednesday faulted Ben Bernanke, the chairman of the Federal Reserve, for poor communication, underscoring the pressure the Fed faces ahead of Thursday’s decision on interest rates.
The Federal Reserve is almost certain to raise interest rates for the 17th successive time, to 5.25 per cent. Attention will be focused on its statement, which may offer some clues as to whether this rate rise will be followed by at least one more later this year.
While there have been rumours that the Fed could surprise the market with a 50 basis point increase, that is unlikely, Fed watchers say.
The modern Fed has a tradition of gradualism and Mr Bernanke is trying to make himself better understood by investors.
Rather, the crux of the debate at the Federal Open Market Committee is likely to revolve around what signal its rate rise today will send about its future intentions, and whether that should be amplified or moderated by the wording of the statement. Yesterday's criticism from the Chamber of Commerce will only amplify pressure on Mr Bernanke to get this signal right.
Martin Regalia, chief economist at the chamber, told reporters: "He says one thing one day and says something entirely different the next week. If we graded him on what he's actually done, he'd be a B+/A-. But if you graded him on what he'd said, he would be a C- to a D."
Three successive upside surprises on core inflation have put the Fed in a bind. Policymakers still want to focus on a forward-looking inflation forecast and a balance of risks assessment, rather than backward-looking current data. But they cannot afford to ignore the effect of current inflation surprises on inflation expectations.
Members of the committee will draw some comfort from the decline in long-term market-based inflation expectations since Mr Bernanke's hawkish speech on June 5. However, the spread between nominal and inflation-protected Treasuries remains 24 basis points higher than it was at the start of the year.
Moreover, the recent decline has come as the market has priced in a much increased probability of further rate increases later this year. At the start of June, the futures market put a near zero probability on a further rate rise to 5.5 per cent in August. It now prices in a nearly 90 per cent chance that the Fed will raise again then.
The question is whether the Fed is comfortable with this big swing. It helps to damp inflation fears but risks boxing the Fed in. Policymakers are aware of the dangers of springing a dovish surprise at a time when Mr Bernanke's inflation-fighting credentials are questioned.
Peter Hooper, a former Fed official who works at Deutsche Bank, says the debate will be whether to stick to the line about inflation concerns, and cement expectations of an August rise, or "loosen things up a bit to increase their options".
The risk-management perspective would suggest that the Fed would prefer to err on the side of tightening too much rather than too little. But Fed insiders are persuaded that the desired cyclical slowdown is already under way. The chairman's tough line since June 5 has arguably muddied earlier attempts to explain a forward-looking framework. In particular, his emphasis on three- and six-month core inflation readings risks making the Fed the prisoner of volatile monthly data.
In all likelihood, the Fed will try to walk a fine line between sounding suitably hawkish while keeping some room for manoeuvre in August. Between now and the next policy meeting fresh data may confirm the slowdown. Moreover, Mr Bernanke has a golden opportunity in the shape of his twice-yearly economic report to Congress on July 19 to try to clear up misunderstandings on Fed thinking.
By Krishna Guha in Washington
Copyright The Financial Times Limited 2006
Published: June 29 2006 03:00 | Last updated: June 29 2006 03:00
The influential US Chamber of Commerce on Wednesday faulted Ben Bernanke, the chairman of the Federal Reserve, for poor communication, underscoring the pressure the Fed faces ahead of Thursday’s decision on interest rates.
The Federal Reserve is almost certain to raise interest rates for the 17th successive time, to 5.25 per cent. Attention will be focused on its statement, which may offer some clues as to whether this rate rise will be followed by at least one more later this year.
While there have been rumours that the Fed could surprise the market with a 50 basis point increase, that is unlikely, Fed watchers say.
The modern Fed has a tradition of gradualism and Mr Bernanke is trying to make himself better understood by investors.
Rather, the crux of the debate at the Federal Open Market Committee is likely to revolve around what signal its rate rise today will send about its future intentions, and whether that should be amplified or moderated by the wording of the statement. Yesterday's criticism from the Chamber of Commerce will only amplify pressure on Mr Bernanke to get this signal right.
Martin Regalia, chief economist at the chamber, told reporters: "He says one thing one day and says something entirely different the next week. If we graded him on what he's actually done, he'd be a B+/A-. But if you graded him on what he'd said, he would be a C- to a D."
Three successive upside surprises on core inflation have put the Fed in a bind. Policymakers still want to focus on a forward-looking inflation forecast and a balance of risks assessment, rather than backward-looking current data. But they cannot afford to ignore the effect of current inflation surprises on inflation expectations.
Members of the committee will draw some comfort from the decline in long-term market-based inflation expectations since Mr Bernanke's hawkish speech on June 5. However, the spread between nominal and inflation-protected Treasuries remains 24 basis points higher than it was at the start of the year.
Moreover, the recent decline has come as the market has priced in a much increased probability of further rate increases later this year. At the start of June, the futures market put a near zero probability on a further rate rise to 5.5 per cent in August. It now prices in a nearly 90 per cent chance that the Fed will raise again then.
The question is whether the Fed is comfortable with this big swing. It helps to damp inflation fears but risks boxing the Fed in. Policymakers are aware of the dangers of springing a dovish surprise at a time when Mr Bernanke's inflation-fighting credentials are questioned.
Peter Hooper, a former Fed official who works at Deutsche Bank, says the debate will be whether to stick to the line about inflation concerns, and cement expectations of an August rise, or "loosen things up a bit to increase their options".
The risk-management perspective would suggest that the Fed would prefer to err on the side of tightening too much rather than too little. But Fed insiders are persuaded that the desired cyclical slowdown is already under way. The chairman's tough line since June 5 has arguably muddied earlier attempts to explain a forward-looking framework. In particular, his emphasis on three- and six-month core inflation readings risks making the Fed the prisoner of volatile monthly data.
In all likelihood, the Fed will try to walk a fine line between sounding suitably hawkish while keeping some room for manoeuvre in August. Between now and the next policy meeting fresh data may confirm the slowdown. Moreover, Mr Bernanke has a golden opportunity in the shape of his twice-yearly economic report to Congress on July 19 to try to clear up misunderstandings on Fed thinking.
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