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Awesome powers

20 June 2013 By Jeffrey Goldfarb, Agnes T. Crane

Ben Bernanke should be more of an international man of mystery. Though the Fed chairman has embraced a more communicative approach than his predecessors, the benefits aren’t always obvious. Based on the latest reaction, investors are parsing his comments as much as they did Alan Greenspan’s. Maybe fewer words would say more.

The former Princeton professor has created an increasingly didactic central bank. For one, Federal Open Market Committee statements are longer. Wednesday’s clocked in at almost 700 words. One from June 2003, when the group then led by Greenspan slashed the federal funds target rate, was barely 300. Bernanke also took the bold step of adding regular press conferences following meetings of the rate-setting body and has now held 10 of them.

Trying to be less Delphic hasn’t helped. The day after Greenspan delivered an evening speech in December 1996, the world’s stock and bond markets seized on the now-canonical two-word phrase “irrational exuberance” and went wild in expectation of tightening. The full context of the remark – posed as a question about how to assess markets in the context of monetary policy – was lost on investors then just as it is now to history. After all, interpreting Greenspan became sport.

Bernanke’s loquaciousness led to a similar fate. He went to great lengths to qualify when the central bank would end its $85 billion of monthly bond buying. And he was explicit to say that slowing the purchases in measured steps shouldn’t be viewed as tightening policy – an important distinction that went unheeded as stocks tumbled and Treasury yields spiked.

More explanations were supposed to keep investors focused on economic data instead of vague pronouncements from secretive policymakers. In theory, greater transparency should make markets more efficient. In practice, irrationality reigns. Given the Fed’s extraordinary presence in the markets, any extended discussion of ending quantitative easing was bound to shake things up.

It isn’t time to revert to former Bank of England Governor Montagu Norman’s “never explain, never excuse.” But a little more mystique might serve the U.S. central bank. For example, timelines of the sort now part of the vernacular imply certainty where there isn’t any and require too many words to justify in any case. Greenspan liked to quip that if he seemed too clear, he was being misunderstood. It’s a point for the Fed to take seriously.


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