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Today's Commentary: 02.20.06
Clearly Speaking - Almost

Ben Bernanke made his first semi-annual pilgrimage to Congress last week. No real surprises were had and for the most part, none were expected. He has billed as the "straight talking" Federal Reserve Chief, the opposite of what Alan Greenspan was, and for the most part, he delivered the goods as predicted.

While Mr. Bernanke was not as obtuse, his first fourteen days on the job have revealed less of what was predicted when he took the office. The former head of Council of Economic Advisors ­ which released its 270 page report just last week as well and which Mr. B had supposedly removed himself from any authoring credits ­ seemed as competent (read: tolerant) as his predecessor was in handling the questions posed by our elected officials in charge of banking, finance, and fiscal oversight.

His answers were short and for the most part, to the point. Wall Street wanted to cheer for his crystal clarity, a welcome change from the roundabout that Greenspan-speak was on and did so pushing the Dow above 11,000. But at the same time, they should learn to read between the lines.

While the markets rallied last week, relieved that for once they could put away their Fed decoders and get back to the business of trading, the street should have paid just a little more attention to what Bernanke was saying.

First was the reference to data. The data Ben was referring to in his statement on monetary policy is apparently reflective of recent activity. In fact, the problem with many of the indicators he is using is the lag time. Much of the economic data available, at least to we mere mortals, shows the effects of monetary policy well behind reality, often by as much as eighteen months.

Fighting inflation, which may or may not be real depending on which data you use, by using monetary policy is what the Fed is designed to do. By suggesting that the current policy of quarter point rate hikes from 1% to 4 1/2% (and well expected to continue with the March 28th meeting) has been absorbed by the economy is troubling. The plainspoken economist intimated that rate increases would continue in the near term because of this fact.

Second was his insistence on what the parameters of his job actually were. He did this by suggesting that Congress is responsible for taxation issues and spending problems. The CEA report, if it can be interpreted as any indication of what is on Ben's mind, suggests that he is concerned with how his "data driven" policy will be perceived in light of issues such as the deficit, trade imbalances, and the buckshot economics of the White House. He knows he will need to be quick on his feet because all of the above will impact his decisions.

So which data is driving the new Fed chief? Is it the robust recent reports such as the housing numbers and retail sales in January - possibly both an anomaly of the weather?

Or is it the inverted yield curve - a situation that fixed income traders interpret as a precursor to a downturn? Inverted curves, for those who may not be aware occur when short term borrowers find a better yield in the short term rather than longer term fixed income offerings. It portends a lack of economic confidence.

Could it possibly be money supply? You don't hear much about it of late and for good reason. It lacks all sorts of sex appeal for one and secondly, with the consumer using their home's as ATMs or at least until recently, no one cared. The money always seemed to be flowing, M1 or not. The M1 is the basic measure of available dollars.

But the M2 is the inflation adjusted supply number. That economic statistic, often referred to as a leading indicator, is at low not seen since 2001 - right before the recession. This means that prices are growing as fast as money available to use for purchases. Wall Street should take note because that cannot be interpreted as a good sign.

The new Fed chief offered some upwardly revised numbers on the economy, widening the breadth of its possible growth to 4%. Is Mr. Bernanke's revised outlook for GDP based on the belief that expanding trade deficits, a strong dollar, a restrained Chinese currency and the United States continued reliance on overseas funding as just good economic policy? If so, is he adjusting his data for the possible, better yet, probable change in any one of those indicators?

Should the dollar weaken, the economy will slip more than just a few basis points and could conceivably find its way to the downside, outside the revised range Bernanke has suggested. Should the Chinese revalue their currency, currently priced against a basket of other currencies, prices for goods will rise here in the States. Should the trade deficit decline, is the Fed prepared to move quickly even though, as I mentioned earlier, it takes eighteen months for any Fed activity to take hold?

I suppose, that if Mr. Bernanke did not have an answer these question, he would do as he did last week: simply not answer at all. In other words, we are just going to have wait and see just how much transparency the Bernanke Fed will provide. I'm expecting it will be more than Greenspan but it still won't be a lot.

BlueMoney Report

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