Financial Times Editorial - Bernanke's credibility
Financial Times Editorial - Bernanke's credibility
Published: June 16 2006 03:00 | Last updated: June 16 2006 03:00
Copyright by The Financial Times
Ben Bernanke can be forgiven for feeling a little bit bruised. Just four months into his job, the chairman of the US Federal Reserve has been branded a greenhorn who took the place of a Greenspan. In response to a series of market-moving comments - first suggesting there would be an interest-rate pause, next telling a broadcast journalist the markets had misinterpreted what he meant, then telling everyone he was worried about inflation - the markets are convinced Mr Bernanke is an inflation dove who needs to prove otherwise.
There are no good reasons for thinking Mr Bernanke is a dove. Nor do the chairman's recent verbal mishaps amount to such a radical departure from the record of Alan Greenspan, who also slipped up on occasions (although slightly more elliptically). At this critical fork in the US economic cycle any chairman would have trouble communicating the Fed's interest-rate trajectory. Nevertheless, fair or otherwise, Mr Bernanke's difficulties have been compounded by his perceived lack of credibility in the markets. This will probably force him to raise the benchmark rate more than he might otherwise have needed to at a time when the US growth machine is showing un mistakable signs of slowing.
That is certainly the view of the futures market, which anticipates a 17th consecutive quarter-point rise at the next open market committee meeting at the end of this month and an almost 50:50 chance of a further squeeze at the one after that in August. Of course, much of the market's bearishness also derives from the recent increase in US core inflation, which is now running at 3.8 per cent on a three-month average and 2.9 per cent over six months - well ahead of Mr Bernanke's comfort zone of between 1 and 2 per cent.
But monetary tightening feeds through into the economy with a significant time lag. There are also clear signs that economic growth is slowing in line with the Fed's expectations. For example, US industrial production fell by 0.1 per cent in May, significantly below market forecasts. And house prices, which have propped up America's rip-roaring consumer spending growth in the last five years, continue to decelerate. It is still reasonable to assume that US economic growth will fall to 3 per cent or below in the second half of 2006, which ought to bring about a reduction in core inflation.
So why raise rates more than is probably merited? In short, because the price of suffering slightly slower growth than necessary is still easier to bear than having a Fed chairman whose anti-inflation credentials remain in question. As this newspaper has argued, life would be simpler if the Fed adopted an inflation-targeting model in line with many other developed economies. That is also Mr Bernanke's aim. In the meantime, Mr Bernanke should brace for further turbulence.
Published: June 16 2006 03:00 | Last updated: June 16 2006 03:00
Copyright by The Financial Times
Ben Bernanke can be forgiven for feeling a little bit bruised. Just four months into his job, the chairman of the US Federal Reserve has been branded a greenhorn who took the place of a Greenspan. In response to a series of market-moving comments - first suggesting there would be an interest-rate pause, next telling a broadcast journalist the markets had misinterpreted what he meant, then telling everyone he was worried about inflation - the markets are convinced Mr Bernanke is an inflation dove who needs to prove otherwise.
There are no good reasons for thinking Mr Bernanke is a dove. Nor do the chairman's recent verbal mishaps amount to such a radical departure from the record of Alan Greenspan, who also slipped up on occasions (although slightly more elliptically). At this critical fork in the US economic cycle any chairman would have trouble communicating the Fed's interest-rate trajectory. Nevertheless, fair or otherwise, Mr Bernanke's difficulties have been compounded by his perceived lack of credibility in the markets. This will probably force him to raise the benchmark rate more than he might otherwise have needed to at a time when the US growth machine is showing un mistakable signs of slowing.
That is certainly the view of the futures market, which anticipates a 17th consecutive quarter-point rise at the next open market committee meeting at the end of this month and an almost 50:50 chance of a further squeeze at the one after that in August. Of course, much of the market's bearishness also derives from the recent increase in US core inflation, which is now running at 3.8 per cent on a three-month average and 2.9 per cent over six months - well ahead of Mr Bernanke's comfort zone of between 1 and 2 per cent.
But monetary tightening feeds through into the economy with a significant time lag. There are also clear signs that economic growth is slowing in line with the Fed's expectations. For example, US industrial production fell by 0.1 per cent in May, significantly below market forecasts. And house prices, which have propped up America's rip-roaring consumer spending growth in the last five years, continue to decelerate. It is still reasonable to assume that US economic growth will fall to 3 per cent or below in the second half of 2006, which ought to bring about a reduction in core inflation.
So why raise rates more than is probably merited? In short, because the price of suffering slightly slower growth than necessary is still easier to bear than having a Fed chairman whose anti-inflation credentials remain in question. As this newspaper has argued, life would be simpler if the Fed adopted an inflation-targeting model in line with many other developed economies. That is also Mr Bernanke's aim. In the meantime, Mr Bernanke should brace for further turbulence.
posted by Carlos T Mock at 4:04 PM
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