For a Federal Reserve chairman, loose lips may not sink ships, but they can send Wall Street into a tizzy, as Ben Bernanke has learned three months into the job. The markets took a tumble on May 2 after CNBC anchor Maria Bartiromo announced on the air that the Fed chief had told her at a party that investors had misconstrued his stance on a possible end to rate hikes in his Apr. 27 speech before lawmakers. (Bartiromo contributes a regular column to BusinessWeek.)
Chalk it up to on-the-job training for the world's most powerful central banker. Bernanke has made it his mission to bring more openness to an institution that has long shielded its deliberations from the public. While straight shooting may have backfired in this skirmish, Bernanke is unlikely to step back from his campaign.
"He would rather make mistakes than clam up," says former Fed Governor Lyle Gramley, now senior economic adviser at the Stanford Washington Research Group. Bernanke may even conclude from the episode that he needs to accelerate his openness project, say Fed watchers. For now, he will likely stay mum until the next meeting of the Federal Open Markets Committee on May 10, which is expected to raise rates another quarter point, to 5%.
GOOD INTENTIONS?. While Bernanke is unlikely to make radical changes in the statement issued after that FOMC meeting, Fed watchers say he could aid his cause by eventually disclosing the central bank's forecasts of economic growth and inflation more frequently to the public.
After all, Bernanke faces a special challenge explaining the Fed's intentions right now. After a string of 15 consecutive quarter-point rate hikes by the central bank since June, 2004, he's operating at a delicate moment. The markets are on pins and needles about when the tightening cycle might ease.
At his last public appearance before a congressional panel, on Apr. 27, Bernanke signaled strongly that the Fed may take a temporary pause, or "take no action at one or more meetings," while it digests incoming data about the health of the economy. He added that "a decision to take no action at a particular meeting does not preclude actions at subsequent meetings." Investors looking for good news focused on the first half of that message, and bid stocks and Treasuries higher on Apr. 27 immediately after his statement. The optimism was deflated after Bartiromo's May 2 remarks.
SIT ONE OUT. To avoid market misperceptions in the future, Fed watchers say Bernanke and the Fed have to do a better job explaining the rationale behind a shift from lock-step rate hikes to a period of intermittent rate hikes. "It's a new game," says Alan Sinai, global chief economist at Decision Economics. "The Fed has launched into a different phase."
The Fed may not end rate hikes altogether, because inflation is creeping up in tandem with rising oil prices and tightening labor markets. But it may not raise rates at every meeting, because the effects of earlier rate hikes will likely kick in soon to slow down the economy. By releasing its forecasts for economic growth and inflation on a more frequent basis, the Fed may help the public understand better why policymakers may choose to sit out one rate hike -- even in the face of inflation -- if the economy looks headed for a slowdown over the next few months.
As Bernanke's brush with Bartiromo shows, the path to more openness won't always be smooth. But the Fed chief still seems committed to his mission, betting that the central bank will be able to do its job better when it communicates its intentions clearly to the markets.