Bernanke´s greatest flop: A failure to communicate

“We hope the Fed is right that clearer communication can smooth the process of policy normalization, and we desperately hope they can deliver clarity in their communication soon.” Julia Coronado, BNP Paribas.

From the unfolding of market events in the last two days it is clear ‘clarity’ was conspicuously absent.

And Bernanke has been at it for so long. In January 2000 he wrote, with Mishkin and Posen:

Inflation targeting does not mandate that the central bank maintain the announced inflation target level at all times, come hell, high water or severe economic shocks. In fact, inflation-targeting central banks have found that they have more flexibility to respond to adverse events like financial crises and commodity price shocks. Since the central bank explains why it may have to miss the target and how it plans to get back on track, inflation helps maintain confidence in the commitment to price stability even when adverse developments lead to missed targets.

In 2008 he persistently rejected making use of the ‘theoretical’ flexibility.

Adoption of inflation targeting by the Federal Reserve would bring several major advantages over the current, less structured approach. First, it would transform the commitment to price stability—which has served us so well under Mr. Greenspan and his predecessor, Paul Volcker—from a personal preference of the chairman into an official policy. By depersonalizing and institutionalizing the Greenspan policy approach, the Fed would increase the likelihood that future U.S. monetary policy will look like the 1980s and 1990s rather than the 1930s or the 1970s.

It ended up looking like the 1930s

Third, increased transparency would diminish financial and economic uncertainty. More information from the Fed about its plans and expectations would reduce the perpetual, and wasteful, attempts by financial market participants to guess what the Fed will do next. An inflation target would also make it easier for businesses and consumers to plan.

Apparently financial and economic uncertainty has increased! Greenspan´s ‘mutterings’ were more easily interpreted!

The word that caused havoc: “Taper”. While in his prepared comment he warned against “premature tightening” (sending markets up) in the Q&A he said that he Fed might “taper” in the next few meetings…(sending markets down).

Although formally “taper” means “reduction” (in asset purchases), the market´s interpretation was “policy will tighten”. Less “easy” policy means in this day and age “tighter” policy.

Upshot: he was careless in his choice of words, conveying a negative image.

It´s midnight over here and noon in Japan. The Nikkei is up close to 3% but I have no idea what I´ll see when I wake up.