June 12 (Bloomberg) -- Financial markets have had a rough few weeks. For Ben Bernanke, things have been even rougher.

When he appointed Bernanke to replace Alan Greenspan as Federal Reserve chairman, President George W. Bush lauded Bernanke's speeches for their ``keen insight and clear, simple language.'' That praise was well-deserved. Bernanke is renowned in the economic community for his intellect and wit.

Lately, investors appear to be wondering where those attributes went.

The headlines have hardly been the kind a new Fed chairman would desire. Last week, the Associated Press ran a story headlined ``Fed's Warning Roils Markets.'' CNN.com did a story on ``The Bernanke Panic.''

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.''

While all this chattering has been going on, equity markets have headed down, big time. Whenever investors lose money, they seek a scapegoat, and everyone seems to have found the perfect one in Bernanke.

Unfair Carping

Hold on now. All of this carping about Bernanke's performance is unfair. With the exception of his now infamous exchange with CNBC's Maria Bartiromo at the White House Correspondents Association dinner in April, Bernanke's public speeches have most likely been drafted and vetted by the same able career staffers who helped Greenspan work his magic.

If anything, that crack team is probably more alert under Bernanke, because of their acute awareness that the current level of scrutiny is so high. And Bernanke himself is smart enough to be obscure when he needs to be.

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.

The Fed has increased interest rates now at 16 consecutive meetings. During this time, the economy has grown at a rate that traditionally might be characterized as ``overheated.'' Now economic growth is clearly slowing, but signs of inflation are still all around us.

Tighten or Ease?

Should the Fed tighten even more, perhaps exposing the economy to a recession risk, or should it ease up now, and trust that the deceleration already in train will soften inflation risks? I have no idea what the right answer is.

You don't know what the right answer is either, and neither does anyone at the Fed. I'll bet even Maria Bartiromo doesn't know.

Sometimes economics has the answers. Sometimes it doesn't. Now is one of those times when it doesn't.

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.

Greenspan's Fed

That is tough on us, and especially tough on 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.

Whenever there is a tightening cycle, markets are always puzzled and dismayed by the question, ``When will the tightening end?'' If Greenspan were at the Fed right now, market volatility would be the same, because the Fed's uncertainty about when to stop would be the same.

He isn't at the Fed now, and somebody else is, a person who is supremely able to deal with the difficult task of managing monetary policy. But Bernanke's job would be a lot easier now if the Fed had simply increased the federal funds rate enough last year so they could have halted the increases in Greenspan's last meeting in January.

A Different Start

If they had pursued that strategy, they would have slowed the overheating at a much more propitious time, and allowed Bernanke to start his tenure with a few quiet meetings where the Fed made no changes at all to interest rates.

Instead, Bernanke inherited this tempest. He did so because the tough decisions that should have been made last year were avoided.

So what can Bernanke do to get his groove back? Easy. Figure out what federal funds rate is the one he ultimately wants to hit, get there at the next meeting, and announce that the tightening is done. Markets will celebrate, and the days of confusion will be behind us.

(Commentary. Kevin Hassett is director of economic policy studies at the American Enterprise Institute. He was chief economic adviser to Republican Senator John McCain of Arizona during the 2000 primaries. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org.

Last Updated: June 12, 2006 00:10 EDT