Bernanke starts strong but soon gets all too familiar
By Caroline Baum
BLOOMBERG NEWS
04/02/2006
Maybe it's by chance the advent of a new Federal Reserve chairman interested in greater transparency and clearer communication coincided with the introduction of a new Fed Web page for kids.
"The new Web page is designed in a user-friendly, question-and-answer format to ensure easy navigation and the ability to learn basic information about the Fed," according to a March 27 news release.
Ben Bernanke, who last week concluded his first meeting as Fed chairman, used a more user-friendly format as well (no Q&A just yet). He didn't achieve his goal of full transparency in his first time at bat.
The first part of the statement announcing an increase in the overnight federal funds rate by a quarter point to 4.75 percent was something the man on the street could understand. The Fed said the fourth-quarter slowdown in economic growth (1.6 percent) was due to "special factors." The rebound in first-quarter growth is expected to give way to a more moderate, sustainable pace.
For the first time, policymakers "gave us a little more color on how they're viewing the economy," said Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. "They're downplaying both the fourth-quarter weakness and the first-quarter strength."
What we're left with is the Fed's forecast for economic growth at a "sustainable," or non-inflationary, pace.
The Fed went on to say that, to date, higher energy prices have had only a "modest effect on core inflation," thanks to productivity gains and tame inflation expectations.
So far, so good. At that point, the new editor seems to have left for the day, and the statement reverts to predecessor Alan Greenspan's preferred boilerplate. (Didn't Bernanke promise continuity with the Greenspan Fed?)
"Possible increases in resource utilization" -- code for the decline in the unemployment rate -- "in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures," the Fed said.
Close your eyes for a moment. If you had no idea that the U.S. unemployment rate was 4.8 percent, exactly half the rate of France, would you have any inkling that labor was in short supply? From the absence of any increase in the workweek to the tepid gains in employee compensation to the lack of anecdotal reports of companies desperate to hire, there is just no evidence of a tight labor market.
"Show me how resource utilization has any impact on inflation in the last 10 years," said Joe Carson, director of economic research at Alliance Bernstein.
Even if the domestic labor market were really tight, companies can shift production overseas and fill the jobs with locals.
I was particularly interested in what the Fed's Kids Page had to say about inflation.
"Inflation means that the general level of prices of goods and services is increasing," according to the Web site.
The source of inflation -- too much money, courtesy of the central bank -- wasn't spelled out. But at least the kids got a proper gauge for measuring it. Under the influence of Greenspan, the Fed adopted the personal consumption expenditures, or PCE, price index, excluding food and energy, as its preferred inflation measure.
It is really nothing of the kind. The core PCE price index measures the prices of the goods and services consumers buy in any given month excluding the prices of food and energy. It is a cost-of-living index that excludes two major costs of living. It fails to capture how much worse off consumers are (their utility function) if they substitute cheaper goods for the more-expensive ones they prefer.
I'm glad the kids are learning the true meaning of inflation.
The final paragraph of the statement, the one that precedes the details of how committee members voted, was cut and pasted from the Jan. 31 statement.
No wonder many economists saw no difference between the Jan. 31 and March 28 policy statements.
Whether you agree with the Fed's assessment of the economy or the policy prescription for it, the first paragraph of the statement opens a crack in the window into the Fed's thinking.
I went back to the Kids Page to check out the explanation of monetary policy. The section "What is the FOMC, and what does it do?" walked me through the composition of the Federal Open Market Committee (seven governors in Washington and five of the 12 District Bank presidents across the country voting at any given time). It explains how monetary policy influences "the availability and cost of money and credit," which in turn affect output, employment and inflation. It concludes with a reference to the statement issued after each meeting that explains the decision and offers "some important information about the FOMC's evaluation of the economy."
The hyperlink at the bottom, "Learn More," directs the reader to the FOMC home page, with a prominent link to the Fed statements.
Uh-oh. Until then, the kids probably were doing OK.
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