June 12, 2006
Transparency Versus Uncertainty (Continued)
Last week, commenting (favorably) on a column from Bloomberg's Caroline Baum I wrote:
I don't think monetary policymakers are speaking with forked tongues, but right now the data certainly are.
Reinforcing the view that Bernanke is confusing markets was a review of his public comments by TheStreet.com, which asserted that in a fairly short span, he has moved from inflation hawk to dove and back to hawk. Bloomberg News columnist Caroline Baum captured the mood on trading floors best with last week's piece titled, "Traders Pine for Days of Greenspan Spoon Feeding.''...
The problem has nothing to do with confusing utterances. It's not the words, it's the facts. Markets are roiling because the fundamentals themselves are uncertain.
Given the high level of uncertainty, the only thing we can do is wait and see how the data move. Will the economic numbers pick up again, suggesting that monetary tightening has yet to do its work? If so, then the Fed will have to keep pushing on the brakes. But if the data continue to look weak, and inflation appears to be retreating, then the Fed can stop being the bad guy.
Each new data point will potentially have a big effect on optimal policy and Fed action because we are, right now, at a turning point.
Mr. Hassett goes a step further, and lays some blame off on that guy that had the job before Mr. Bernanke:
The sad thing is, it didn't have to be this way.
If you consider that a "neutral'' federal funds rate is probably around 4.5 percent, and that the rate was below that all of last year, one must conclude that the Fed had its foot on the gas right up to Greenspan's departure. We are in this difficult spot because the Fed was far too easy when growth was hot last year, leaving all of the tough work for Bernanke.
Well, maybe, but my recollection is that things weren't really all that much easier then. On November 29, for example, I highlighted the following passage from the Wall Street Journal:
Bond investors, worried about slackening home sales, nudged the threat level on their economic early-warning system a notch higher yesterday.
In an unusual event known as a partial inversion of the yield curve, investors kept buying five-year Treasury notes until their yield, which reflects expectations of how the economy will fare over the next several years, fell below the yield on two-year notes, which tracks expectations of what the Federal Reserve will do with interest rates in the shorter term.
On that date the federal funds rate sat at 4 percent, and the speculation of many was that the FOMC may have already blasted through "neutral," and was flirting with putting the economy in the tank.
You may or may not buy the argument that the current confusion surrounding statements from our central bankers is the inevitable consequence of economic circumstances. But if you do, I'd contend that what is fair to the current goose is also fair to the former gander.
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