Get a grip, Bernanke, it's a rocky ride ahead
By TERRY McCRANN
18jun06
THE big jump in share prices on Wall St late in the week does not signal that happy days are here again.
In fact, disturbingly, it points to the exact opposite because the rises were not in response to good news about the real US or global economy, but simply snatching at flip-flopping comments over inflation and interest rates.
Not just anyone's flip-flopping comments, but those of the man who has his finger on the global economic and financial "button", so to speak -- head of the US Federal Reserve, Ben Bernanke.
I had dubbed him "Big Ben" -- in perhaps hopeful expectation that he would emulate the success of our own "Big Mac", Ian Macfarlane, head of the Reserve Bank.
And I note that some other commentators have taken up the tag.
On reflection, on his few months on the job, perhaps that needs to be amended to "Big flip-flopping Ben".
The flip-flopping is bad enough. One day suggesting that he'd ease off on interest rate increases to keep the US -- and global -- economies growing strongly; the next reaffirming a determination to cut inflation off at the pass, so that no one should assume there wouldn't be further rate rises. That's bad enough and is a world away from his predecessor Alan Greenspan's deliberately dense Delphic declamations.
Probably apocryphally, Greenspan was supposed to have once said: "Senator, if you can understand what I am saying, I must not be making myself clear."
Much worse, Bernanke has been getting into tit-for-tat interplay with investors.
That leads not only to wild swings and more "clarifications" from Bernanke -- but raises two even more fundamental questions. Will he be able to lead the Fed as Greenspan did? And lead it in which direction?
This all started at the end of April, when Bernanke made himself not only all "too clear", but dangerously, confusingly so.
He said, without the slightest "Delphicism", that the Fed might pause in lifting rates even if it still felt inflation was too high.
Not surprisingly, investors took this as one big signal: rate rises over, go for it.
But just four days later, Bernanke completely flip-flopped -- reacting to that bullish enthusiasm. Worse, he did it almost casually in an off-the-cuff comment to a reporter at a dinner, that markets were wrong in assuming the rate hikes had ended.
Kaboom! That was seen as signalling further rate hikes, and Wall St and our market went straight on to the escalator down, through May.
It's been downhill for clarity ever since. Instead of shutting up and letting Fed decisions talk, Bernanke has been reacting to every market and statistical shift.
On Thursday, he gave the market a boost by saying we'd largely dealt with high petrol prices, so "when inflation expectations are anchored the monetary policy response can be more limited".
This might all seem a long way from Australia, our economy and our sharemarket.
That's exactly wrong -- indeed, what "Big flip-flopping Ben" does with US rates is far more potent than what our "Big Mac" might do for your job, your income, the value of your house, your super and other investments, directly in terms of sharemarkets around the world; indirectly in terms of the global economy and the commodity prices that are underwriting our prosperity.
We are now facing an extremely dangerous situation -- that what Bernanke says about interest rates is going to collide with what he actually does.
Or worse, tries to do. Unlike our RBA, the Fed actually votes on decisions and those votes are published immediately.
It's not just that Greenspan never lost a vote, but they were almost always unanimous. It's obviously too soon to suggest Bernanke could be in trouble, but he clearly has to get a grip.
The first step will be a rate hike at the end of the month. Not hiking would be disastrous. What he says and what he does next is critical.
Until he gets that grip, forget about "happy days are here again". The only question for investors is, do they ride the volatility or head for the exits?
heraldsun.news.com.au |
