Federal Reserve chairman faces press scrutiny

Philip Salter
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TODAY, for the first time in its 97-year history, the US Federal Reserve will start hosting quarterly press conferences in an attempt to better explain the decisions of its Federal Open Market Committee (FOMC). Replicating the Bank of England (BoE) and the European Central Bank (ECB), these press conferences will help to make the chairman’s motivations more transparent to the markets. However, despite this, chairman Ben Bernanke will ultimately be judged on whether he is able to manage inflation.

The FOMC statement will be released at 5.30pm, while Bernanke will speak and take questions from journalists for 45 minutes from 7.15pm. The Fed has stated that these press conferences are “intended to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication.” Bernanke has been keen to communicate his message, appearing on 60 Minutes last December to defend a second round of quantitative easing (QE2) to a wider audience. However, it wasn’t a success as speculation focused on his declaration that he would not be averse to QE3. Bernanke will always have his critics, not least Senator Ron Paul who is once more running for President, but the Fed increasingly faces hostility from the mainstream press and the public at large.

Because of the weeks of delay before the release of the FOMC minutes, Bernanke will be hoping briefings better alert the market of his expectations. Former Fed economist Kenneth Kuttner has said: “By laying out a smooth trajectory, the hope is that it would minimise disruptions and prevent an overreaction.” Michael Hewson of CMC Markets says this is an attempt, in the model of president of the ECB president Jean-Claude Trichet, to telegraph what he is planning in advance. This is particularly pertinent with jitters over how abruptly he should end QE2.

Persistently high unemployment, rising inflation and expectations that first quarter GDP figures released tomorrow will drop significantly from the previous quarter’s 3.1 per cent, are all focusing attention on the Fed. Comments from the more hawkish Fed officials have moved markets in the past: Philadelphia Fed President Charles Plosser and President of the St Louis Federal Reserve Bank James Bullard called for an end to monetary stimulus and bond buying in March, strengthening the dollar. Roberto Perli, a former senior staff economist in the Fed’s division of monetary affairs, has said: “Investors are often left with the impression, which we believe is incorrect, that the hawkish side is more influential than it actually is. This might be one of the reasons why federal funds futures have systematically and incorrectly predicted an early policy tightening in recent years.” Bernanke has made it clear that he is prepared to keep interest rates low for an extended period of time. By speaking ahead of the hawks, it looks as though he wants to be, the Fed’s “porte-parole,” in the words of Trichet.

Forex traders will have to keep an eye on the briefings. While Bernanke is hoping that regular pressers will smooth the market, they could lead to volatility if there is a discrepancy between the FOMC statement and his briefing. However, as Hewson argues, statements will be unlikely to impact upon the market’s overall perception of the dollar. US Treasury Secretary Tim Geithner might claim to want a strong dollar, but as the S&P downgrade on the US outlook suggests, actions speak louder than words.

Bernanke’s apparent bewilderment that markets expect a rate rise this year might stem from his failure to account for the possibility of rising and persistent inflation. If that happens, Paul Volcker’s successful battle with inflation in the 1970s will cast a long shadow over Bernanke and he will face pressure to raise rates. Fed hawk Plosser is a fan of the briefings: “I think it’s a good thing; I am a strong believer in transparency and effective communication, so I support the effort.” But he adds: “Will it change what I say? Ha! I’ll still do what I do.” In the long run Bernanke won’t be judged on his communication strategy, but on whether he was right to keep monetary policy so loose for so long.