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Economists Are Asking: Did Bernanke Tip Fed’s Hand?

Andrew Ross Sorkin
Tuesday, 25 Jun 2013 | 5:51 AM ET
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Is Ben Bernanke being too chatty?

That's the question being put forward by some economists and others about Mr. Bernanke, the normally restrained Federal Reserve chairman, after his comments in May and last week about the economy and the central bank's plans for eventually backing off its stimulus measures.

Last week, his comments that the economic recovery was surpassing forecasts sent the market into a tailspin because Wall Street was worried that the Fed would start easing its bond-buying program and raise interest rates sooner than many had anticipated. That, in turn, could slow the economy, some worry. Since then, the Standard & Poor's 500-stock index has fallen nearly 5 percent.

Mr. Bernanke, hardly one to be described as verbose, said far more during his news conference on Wednesday than he usually does — and he went further about the Fed's policy plans than the committee itself had said earlier in its official statement.

He went so far that one of the Fed's directors, James B. Bullard, publicly questioned the board's decision to let Mr. Bernanke expound upon its thinking. In a statement, Mr. Bullard said he "felt that the committee's decision to authorize the chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed."

(Read More: Bernanke Bond Announcement Was Poorly Timed: Fed's Bullard)

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He went on to say that "a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement."

It wasn't that long ago that any Fed chairman hardly said a word. Until 1994, the Fed did not even regularly issue a statement disclosing a change in policy after its monthly meeting. Alan Greenspan made an art out of talking in circles so that investors couldn't divine his intentions.

Janet Yellen, the Fed's vice chairwoman and a possible successor to Mr. Bernanke, explained in a recent speech that for most of the last century, the Fed's communications policy was modeled on Montagu Norman, governor of the Bank of England, whose motto, she said, was, "Never explain, never excuse."

Ever since the financial crisis, with calls for more transparency, Mr. Bernanke has taken a different tack, holding news conferences and providing specific details and timelines for the Fed's policies.

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In some instances, it has worked magnificently. By laying out a timetable for the Fed's stimulus back in January 2012 — in which he explained the Fed's inflation and unemployment targets — he found a way to create a relative calm in the markets.

Questions about the communications strategy, however, were raised about whether he was oversharing. Would it become, as they might say on Twitter, T.M.I.? (Too Much Information.) The worry back then was that he would box himself into a specific timeline and that he would have a tricky time exiting his stimulus strategy.

Even before Mr. Bernanke spoke last week, he was being blamed for the recent market volatility. "The purpose of central-bank transparency was to give markets clarity and reduce volatility," Ed Yardeni, president and chief investment strategist at Yardeni Research, told Bloomberg News two days before the Bernanke news conference.

"Instead, it's increasing volatility and been counterproductive. Clearly the backup in bond yields and sell-off are disconcerting."

In a perfect world, the Fed's communications strategy should mean the markets are less erratic, not more.

However, with investors hanging on every syllable of every word that comes out of the mouths of Mr. Bernanke and the other board members, volatility seems to have been worse.

(Read More: Bernanke Is Doing the Right Thing: Trichet)

In fairness, everything is relative, so it is possible that the markets would act even more erratically if the communications policy was less straightforward. It is impossible to know. It's the ultimate Catch-22.

During Mr. Bernanke's news conference, he was asked whether his comments went beyond what the committee had agreed on.

"There's no change in policy involved here. There's simply a clarification, helping people to think about where policy will evolve. So, it was thought that it might be best for me to explain that to this group," Mr. Bernanke told reporters.

And yet, his words moved the market because they filled in gaps that a statement from the Fed could never fully communicate.

Ms. Yellen, in her speech, which was given to the Society of American Business Editors and Writers, said that the Fed's move to be more transparent wasn't just for the sake of transparency. She said the Fed's utterances had become an important tool.

The first big communications moment for the Fed, she said, was in 2003 when the central bank was running out of options to spur growth because it had already cut the federal funds rate. So it decided to tell the market that it planned to keep rates low for a considerable period.

(Read More: Buy Treasurys, as Bernanke Is All Talk: Bond Pros)

"The committee was using communication — mere words — as its primary monetary policy tool. Until then, it was probably common to think of communication about future policy as something that supplemented the setting of the federal funds rate. In this case, communication was an independent and effective tool for influencing the economy," she said.

Communication is indeed influencing the markets now. Whether it is too much of a good thing will only truly become apparent down the road.

By CNBC Anchor and New York Times Columnist Andrew Ross Sorkin. Follow him on Twitter @andrewrsorkin.

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