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Email Story to a Friend June 7, 2006 Fed chief's signals confuse investors Bernanke's openness may be hampering him, analysts say, as stocks decline again By JEANNINE AVERSA The Associated Press WASHINGTON — Wall Street had looked to the Federal Reserve's new plain-speaking chairman to cut through the Greenspeak of his predecessor. But investors think they're getting contradictory signals from Ben Bernanke, too, with his latest sending stocks into a nosedive. Stocks dropped Tuesday for the second straight day, with the Dow Jones industrial average falling to its worst close since early March. The Dow, which had plunged more than 110 points earlier in the session, narrowed losses to finish down 46.58 at 11,002.14. Bernanke, who took over the Fed helm on Feb. 1 after longtime Chairman Alan Greenspan retired, has gotten off to a bumpy start in communicating the central bank's interest-rate intentions to Wall Street. The power of the Fed chief comes not only from what he does to interest rates but also what he says. A single utterance can affect the financial fortunes of millions of investors. But while Greenspan's Delphian discourse was legendary, investors had 18-plus years to try to learn how to decipher what he said and the signals he was sending. It will take time for Bernanke to perfect his own signaling system and for investors to get better at reading them, Fed watchers say. Advertisement "Communications is a two-way street. It is difficult. I think Bernanke is learning and I think the markets are learning," said Lyle Gramley, a former Fed board member. Adding to Bernanke's challenge is the economy itself. Economic growth is slowing but inflation is picking up, a tricky situation for Fed policymakers. Bernanke, in a speech Monday, made crystal clear that fending off inflation is the Fed's No. 1 job right now, a message that sent stocks tumbling nearly 200 points as investors faced the likelihood that interest rates would move higher later this month. Bernanke's inflation message was especially jarring to investors because just six weeks earlier the Fed chief had raised the possibility that the central bank might take a temporary break in its two-year rate raising campaign to assess economic conditions. When Bernanke talked about that possibility in his testimony before Congress' Joint Economic Committee on April 27, investors took that to mean the Fed was going to stop boosting rates — rather than just take a pause — probably at the June 28-29 meeting. Stocks rallied. Bernanke later complained to CNBC anchor Maria Bartiromo at an April 29 Washington dinner that investors had misinterpreted his recent congressional remarks as an indication that the Fed was nearly done raising rates. CNBC reported Bernanke's conversation on May 1, sending stocks — which had been up for most of the day — down. Those incidents, which caused stocks to gyrate, was Bernanke's first communications stumble, Fed watchers said. The Fed chief, in a congressional appearance in late May, said he suffered a "lapse of judgment" by talking to the CNBC anchor and pledged that his future communications would be through "regular and formal channels." Observed Gramley: "Bernanke stubbed his toe a bit, but I think he is well aware of that." Some Fed watchers said Bernanke's desire to be more open about the Fed's thinking or providing more specific information about the state of the economy may actually be adding to some of investors' confusion. "It will be interesting to see whether Bernanke continues to take the attitude that openness is good or whether he backs off a little bit," said James Feyrer, economics professor at Dartmouth College. "When Greenspan released a piece of information it was very strategic. It was intended to tell the markets that something was going to happen. Greenspan was a master of signaling," Feyrer said. Bernanke, he said, likes to lay out information and options and be more open. "The markets haven't quite figured out Bernanke and they have been slow to integrate his difference in style." For much of the last two years, the Fed was on automatic pilot and that made it fairly easy on investors to figure out the Fed's next move. Under Greenspan, the Fed began boosting rates in June 2004. Greenspan laid out a strategy of gradual quarter-point increases to move rates from extraordinarily low levels to more normal ones. Before the Fed began tightening credit a key rate was at a 46-year low of 1 percent. It had been sliced that low in a series of moves to cushion fallout from the bursting of the stock market bubble, the 2001 recession, terror attacks and a wave of corporate accounting scandals that rocked Wall Street. Of the Fed's 16 quarter-point rate increases, Greenspan ordered 14 of them and Bernanke ordered two. Now the Fed's key rate is at 5 percent, a five-year high. Bernanke took over "when the Fed reached a fork in the road, where policymakers' next move was not obvious to them or to the markets. It is just a tougher call to know what is going to come next. Bernanke inherited that," said Stuart Hoffman, chief economist at PNC Financial Services Group. These turning points are always more difficult for central bankers to navigate and Greenspan had his own share of communications missteps, economists said. Bernanke sent a clear signal, though on Monday, that the Fed's next move later this month will probably be an increase in its key rate to 5.25 percent. The challenge for the Fed is to push up rates enough to fend off inflation but not so much that the economy is hurt. "It took years to get the Greenspan translation guide, and now we have to learn how to interpret Bernanke," said Richard Yamarone, economist at Argus Research. ------ On the Net: Federal Reserve: http:www.federalreserve.gov/ m Mail Tribune Home | Local News | Sports | Business | Obituaries | Life | Opinion AP News | Archives | Site Map | Community | Classified Copyright © 1997-2006 Mail Tribune, Inc. All rights reserved. Privacy Policy | Terms & Conditions | Website Feedback www.bingo.com Home Security Systems Trunks, Footlocker Custom Build Computers Discount Hotel Reservations --> online casinos news Ashley Furniture HomeStore Send Flowers California Casinos GMAT Prep Windermere Van Vleet Sports Equipment Online Casino Reviews Entertainment Guide --> Online Casino Fundraisers Sudoku Online Casinos Canada Online Pharmacy Advertisements Advertisement