Doug wrote:
> Not exactly. The markets were
> very disappointed with Bernanke's
> testimony yesterday because he
> made it sound as if another rate cut
> is not imminent. Should things
> really unwind, they'll undoubtedly
> change their mind, but the message
> they're sending now is no rate cuts
> unless the econ data look really bad.
In his testimony, Bernanke emphasized the possibility of both a
contraction *and* inflation. Why is he doing this? Isn't he being
reckless or stupid? Wouldn't it have helped him better to issue an
obscure statement a la Greenspan? I don't know. In my opinion,
Bernanke is trying to accomplish two things. One, he's trying to show
the big players that he means it when he speaks of transparency. He's
willing to show the Fed's hand, to the best of his current (but
evolving) understanding of the situation. And, two (as a case in
point), he's saying, "Look, we need a quick but comprehensive
repricing of risk and a resetting of expectations so that credit can
flow and the economy can resume a more normal course. It's going to
hurt anyway, but it'll hurt the least if we do it quickly but
thoroughly. Then and only then will I be free to move rapidly, tackle
inflation, and slow down the USD decline. It's up to you how quickly
we can proceed and leave the episode behind."
It's not a terrible policy. Politically, that'd be ideal for them.
But, of course, it's full of risks, since panic -- within the country
and abroad -- could set in and force his hand under political
pressure. The insulation ("independence") of the central bank from
popular pressure would be tested at a point when the discontent
against both major parties is very high and as the country heads to a
presidential and congressional election. Even if the central bank
remains insulated, fiscal monkey wrenches can be thrown into the
mechanism of monetary policy by the legislative branch. With all the
international shocks feeding into it (Pakistan, Iran, etc.), the whole
dynamics of the presidential election can become less predictable than
it now appears. In any case, the fact that Bernanke decided that he
cannot downplay either scenario, contraction or inflation, indicates
how narrow his wiggle room is.
(Sabri will speak for himself, but it seems to me that his remark on
the CP article was not meant to criticize it for emphasizing the
direst scenarios, but rather to defend the posing of those scenarios
as sensible -- i.e. as *probable*. The certainty the author of the
article displays may make the piece a bit too strident to our
stylistic tastes, but the fact that things are in flux doesn't mean
that all scenarios are equally likely. Not at this point.)
