Biz Buzz: A daily update on economic and business news
Archive: A comprehensive listing of Biz Buzz columns
On the one hand, Bernanke had to demonstrate to the bond market that he is a disciplined inflation fighter. This explains why he raised a key short-term interest rate this afternoon by another quarter of a percentage point to 5 percent. This marked the 16th straight rate hike ordered by the nation's central bank over the past two years.
On the other hand, he had to reassure worried stock investors that he does not plan to be so aggressive in fighting inflation that he will go too far. One too many interest rate hikes could stifle the economy and choke off the equity markets. So, in explaining its decision, Fed officials stressed that any future rate decisions "will depend importantly on the evolution of the economic outlook as implied by incoming information."
But even if new economic data show that inflation is under control, Bernanke can't give Wall Street any firm clues that the Fed is nearing an end to its rate hikes. Doing so would paint the Fed in a box. And if the Fed, for some reason, had to raise rates after it indicated that it would stop lifting them, the central bank would lose credibility with Wall Street.
This is why the Fed indicated that "some further policy firming may yet be needed."
The bottom line: The Fed probably doesn't have a clue what it intends to do at its next monetary policy meeting in June. And investors don't know what the Fed might do or say. But for the moment, this buys Bernanke some time.
The stock market reacted positively to the news, with the Dow Jones industrial average up around 20 points in late trading today.
