Bernanke Smoothly Cheers the Street

At his July 19 testimony before Congress, the Fed chief replaced mixed signals with balanced caution and calmed fears of a recession

You may not be able to guess the Fed's next interest rate move, but you can bet on one thing: Federal Reserve Chairman Ben Bernanke isn't about to dish to Maria Bartiromo after his July 19 testimony before the Senate Banking Committee.

Back in April, after appearing at one of his first congressional hearings, the newly minted Fed chief told the CNBC anchor (and regular BusinessWeek columnist) off-the-record that the markets had misread him—thinking him an inflation dove on the verge of a rate pause. Wall Street doesn't like mixed signals, and financial markets sold off on May 2, the day after Bartiromo reported the conversation on TV.

This time, Bernanke has polished his act. Even though his July 19 testimony came on the same morning as a larger-than-expected rise in the June consumer-price index, the Dow Jones industrials jumped by 212 points and bond yields fell sharply. While Bernanke avoided overt signals about the direction of policymakers' next interest rate moves, investors seemed to see the glimmer of a Fed pause with the central bank's forecast of a slower economy.


  Nearly six months into his tenure, the Fed chief managed to strike a temperate balance, even at a difficult juncture in monetary policy. "The U.S. economy appears to be in a period of transition," Bernanke said to lawmakers.

The central bank's own economic forecast has darkened a tad since it last reported its estimates in February. Economic growth will slow a bit more to as low as 3.25% this year and 3% next year, while core inflation—as measured by the Fed's preferred gauge, personal consumption expenditures—will rise slightly more by as much as 2.5% this year and 2.25% next.

Though the economic slowdown is underway with a deceleration in consumer spending and a softening housing market, Bernanke pointed out that a pickup in business investment and exports might help make up for the slack. He added that productivity should continue to "expand over the next few years."


  All that will help the economy to moderate to a pace consistent with its capacity without overheating. Despite growing investor fears about a drastic slowdown, Bernanke told Senator Paul Sarbanes (D-Md.) in a question-and-answer session: "I don't see a recession as very likely," though he added, "You can never rule out anything."

That said, the Fed chief noted that "the recent rise in inflation is of concern" to the policy-setting Federal Open Market Committee. And the rise in energy and commodity prices pushed inflation higher than the central bank had expected when it last reported its economic forecast in February. By 2007, the Fed anticipates that inflation will moderate with an economic slowdown.

With a 0.29% rise in the Consumer Price Index in June, the core CPI, excluding food and energy prices, has now risen 2.6% year-over-year. And the May personal consumption expenditures (PCE), is now at 2.1%, year-over-year. Both are above the 1% to 2% comfort zone that many Fed officials have said is their preference.


  Bernanke was careful to leave himself some outs—highlighting continued inflation risks, especially in light of unpredictable energy prices in an unstable geopolitical climate. And he reminded lawmakers that he, like his predecessor Alan Greenspan, will take Fed actions to nip harmful risks in the bud before they infect the economy.

At last, Bernanke hit the delicate balance between hawk and dove that he strove unsuccessfully to attain months earlier. But even as he's mastered this act, he has to remain nimble if the economy changes under his feet.

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