Last week the Fed offered some hope. For month in month out the Fed repeatedly talked about the need for further policy firming. It hasn’t changed the rate of interest since last June, but in every meeting since it repeated its ‘policy firming’ warning. Then, when it met again last week, that phrase was omitted from its statement, and some people made much of this, saying this means then that rates will be heading down soon.
But yesterday, Ben Bernanke, chairman of the US Federal Reserve, seemed to dash that particular hope. But in the process, tried to reassure us all that we are worrying needlessly.
First he said: “I do want to emphasise we have not shifted away from an inflation bias,” and, with an inflationary hawkish tone, added, “The high level of resource utilisation remains an important upside risk to continued progress on reducing inflation.”
But then, despite the inflationary warnings, Mr Bernanke struck an optimistic note: “The economy appears likely to continue to expand at a moderate pace over the coming quarters,” he said. And, after turning his attention to the troubled sub-prime market, added: “At this juncture … the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.”
Now Mr Bernanke likes to be considered something of a plain speaker. In this respect he differs from Alan Greenspan, who used to keep markets guessing and would speak in such subtle tones that economists found it quite difficult to interpret his words. This means that if Mr Greenspan was unsure of something, he was still able to present with an air of all seeing economic wisdom. If you like, he took a leaf out of the Ancient Greek oracle at Delphi: speak your prophecies in riddles, and the world thinks you know the future.
But when Mr Bernanke is not sure, he says so. This has led to charges of uncertainty, with some saying he is not as clever as the previous chairman.
The trouble with making your meaning clear is this: if you are wrong, your failings are there in the full light of public scrutiny.
And what Mr Bernanke is saying is quite different from what others are suggesting. Many, including Mr Greenspan, believe the US is in danger of hitting recession. They fear the US housing crisis could drag the economy down with it, and the big hope is that the Fed will lower rates and save the day. But there is one major dread; that the economy slows but the Fed is unable to lower rates because of the inflation dangers.
Mr Bernanke, in his wisdom, is saying the opposite; that rates won’t go down, that the economy is strong anyway. If he is right, good for him and good for Uncle Sam. If he is wrong, it’s a big mistake and one that no one will be able to ignore.
You may recall last month, when markets did that nasty slide, Alan Greenspan warned of a potential US recession. At the time he said: “When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign.” He clarified that statement later by saying he thought the chance of the US hitting recession soon was a third.
But then yesterday, Mr Bernanke said the opposite. “I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end#133;I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”
Now, of course, he may well be right, but if he’s wrong#133;..
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