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Commentary: The Fed: No More Hints Or Whispers


On June 5, Federal Reserve Chairman Ben S. Bernanke hit investors with a bolt from the blue when he worried publicly in a speech about the danger of rising inflation. His unexpected remarks -- which dashed hopes for a pause in rate hikes -- sent the Dow plummeting almost 250 points in two days.

But how could the market be so surprised by a Fed chairman whose mantra is communication? Bernanke seems to have adopted the central banker's version of Regulation FD, for 'fair disclosure,' the securities rule requiring public companies to reveal material information to all investors simultaneously. While his predecessor, Alan Greenspan, often signaled his intended message through winks and nods in off-the-record interviews with the press, the new Fed chief is offering little whispered guidance. Such a shift to public discussion, rather than private hints, is consistent with Bernanke's emphasis on transparency.

Bernanke is also responding, in part, to the aftermath of his well-publicized encounter with CNBC anchor Maria Bartiromo (a regular BusinessWeek columnist) at a Washington dinner. After Bernanke casually said to her that his April congressional testimony had been misread as too dovish, Bartiromo reported his remarks on the air, creating a stir in the markets. Later, Bernanke promised lawmakers that he would communicate through official channels only.

In the short run, Bernanke's reluctance to telegraph his thinking privately may increase market volatility. That's a big reason why stocks moved so sharply on June 5 and 6, since Bernanke hadn't prepared investors for the depth of his inflation fears.

Nevertheless, the experience with Reg FD over the past six years suggests that volatility may ease once the markets get adjusted to Bernanke's style. Remember that before Reg FD went into effect in 2000, companies would typically hold private meetings with stock market analysts, feeding Wall Street nuggets of information about whether the company was doing better or worse than expected. Such private meetings, ahead of official earnings announcements, were justified as a way of letting good news -- or bad -- trickle out into the market slowly.

Reg FD effectively ended such private transmission of corporate information to analysts. At the time, many companies and analysts argued that the lack of private communication would make stock prices swing more sharply, since investors would have no warning of good or bad news.

But complaints about market volatility induced by the rule died down once analysts got used to the new reality. They learned how to better forecast corporate earnings ``rather than have the company do it for them,'' says Georgetown University Law Center professor Donald C. Langevoort.

There's a clear analogy in today's situation. Bernanke wants investors, rather than hanging on his every word, to do their own work on forecasting economic growth and inflation to anticipate the Fed's next move. That should help them think like the Fed, which is basing interest-rate policy on the economy's future course. The quarterback ``has to throw where the receiver is going to be, not where he is at the current moment,'' he said on June 5.

After so many years of Greenspan, investors are not easily going to learn how to think the Bernanke way. But the quicker they do, the less likely they are to be surprised in the future.

By Catherine Yang


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