Bernanke transparency has a downside
At his confirmation hearing last year, Federal Reserve Board Chairman Ben Bernanke was asked a simple question: If confirmed by the Senate, would Bernanke speak "in a language the American people can understand?"
The question was a not-so-subtle jab at Bernanke's predecessor, Alan Greenspan, who often spoke so abstrusely that even theoretical economists couldn't fathom what he was really thinking. Bernanke, who pledged greater transparency at the Fed, responded: "I will try to speak clearly on all occasions."
So far, this strategy is turning out to be a huge mistake. This week, Bernanke roiled the equity markets by stating–in plain English–that inflation was becoming a real threat to the economy. Core inflation, he said, "has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability."
Prior to Bernanke's remarks, the consensus on Wall Street was that the Fed was probably done raising interest rates. But now, a growing number of market strategists believe the Fed could hike short-term rates at least once more when the Fed meets at the end of this month. The threat of further rate hikes spooked Wall Street, leading to a 5 percent drop in the major equity indexes.
"Some time ago, we asked if the markets were ready for clarity in speech from a Fed chairman instead of Green-speak," said David Kotok, chief investment officer for Cumberland Advisors in Vineland, N.J. "So far, the answer is 'no.' "
In his brief tenure, Bernanke has been honest about two things: his feelings about inflation and the fact that he's not entirely certain what he'll do with interest rates. Bernanke indicated that incoming economic data will largely dictate that decision. But on Wall Street, saying that things are bad or that you don't know what's going on is worse than saying nothing at all. "It leads to an even greater sense of uncertainty," says Jim Huguet, president of the investment management firm Great Companies LLC.
Indeed, Jack Ablin, chief investment officer for Harris Private Banks, says transparency is great so long as it leads to predictability, which investors crave. Instead the Bernanke-led Fed has created an environment of transparency leading to uncertainty.
Expect volatility in the markets to persist for the next several weeks, if not months. Joseph Quinlan, chief market strategist for Bank of America's investment strategies group, notes that the next Fed meeting won't take place until June 28. And even then, there are no guarantees that Bernanke will shed any more light on his intentions concerning interest rates.
"People wanted to think that Bernanke was just a clone of Greenspan," said Chris Orndorff, head of equity strategy at Payden & Rygel. "He's not. He has a different view, and he has a different way of communicating that view."