He's been on the job for less than three months, but new Federal Reserve Board Chairman Ben Bernanke may already be losing some credibility with Wall Street.
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You'll recall that last week, the Fed sent the stock market into rally mode when it released minutes of its March monetary policy meeting, which indicated that interest rates might soon stabilize. In those minutes, board members were on record as saying that "the end of the [monetary] tightening process was likely to be near." Morever, some members "expressed concerns about the dangers of tightening too much, given the lags in the effects of policy."
In other words, the nation's central bankers indicated they don't think they should raise interest rates much longer in their effort to combat inflation.
But this week, in testimony before Congress's Joint Economic Committee, Bernanke seemed to be singing a slightly different tune.
To be sure, the chairman did reiterate that the Fed may at some point in the near future decide to stop raising rates. We "will continue to monitor the incoming data closely to assess the prospects for both growth and inflation," Bernanke told Congress this morning. He said that "at some point in the future the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook."
But he added that even if the Fed pauses–which economists think it might do in June, after raising rates one more time in May–it may still not be done. Specifically, he testified that "a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives."
This threat splashed a bit of cold water on the early morning rally in the stock market.
Bernanke apparently wants more time to see how the recent rise in oil prices will affect the economy. As he put it, "rising energy prices pose risks to both economic activity and inflation. If energy prices stabilize this year, even at a high level, their adverse effects on both growth and inflation should diminish somewhat over time. However, as the world has little spare oil production capacity, periodic spikes in oil prices remain a possibility."
Bottom line: Wall Street may not know if the Fed is done raising rates until the third or fourth quarter of this year.
