Off the cuff but on the record

Markets react to Fed leader's words

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May 04, 2006|By BLOOMBERG NEWS

WASHINGTON -- Federal Reserve Chairman Ben S. Bernanke is getting a crash course in what it means to be the head of the world's most powerful central bank.

Financial markets were blindsided Monday after CNBC anchor Maria Bartiromo reported that Bernanke told her that investors were wrong in thinking he's done raising interest rates. Stocks surrendered gains, bonds fell and the dollar jumped in response to the remarks, which Bartiromo said were part of a conversation at the White House Correspondents Association dinner in Washington on Saturday.

It isn't clear exactly what Bernanke said, and a Fed spokeswoman declined to comment.

What is clear, Fed watchers say, is that Bernanke underestimated the scrutiny that anything he says, even in a social situation, will receive now that he's chairman.

"The management of communication here and the way things were said has, I think, undermined a little bit of Fed credibility for now." said John Ryding, chief U.S. economist at Bear Stearns Cos. in New York.

The confusion over the Fed's intentions comes at a delicate time for markets and the central bank. After 15 straight rate increases, investors are alert for any sign that the Fed is about to conclude its tightening campaign, the longest in more than a quarter of a century.

"We were swept off our feet" by CNBC's report, said Richard Franulovich, a currency strategist at Westpac Banking Corp. in New York. "Bernanke is still easing his way into the role and learning what he can and can't say, and to whom. He won't be speaking off the cuff to media people again. He's probably learned a lesson."

Bernanke, who became Fed chairman in February, told Congress' Joint Economic Committee last Thursday that the Fed may suspend the increases even if economic risks are tilted toward faster inflation. The Federal Open Market Committee, the Fed's rate-setting panel, meets Wednesday.

The dollar strengthened to $1.2625 per euro yesterday, from $1.2630 Monday, and declined against the yen. Ten-year Treasury notes added to a slump that pushed them to a fourth-straight monthly loss in April.

"I asked him whether the markets got it right after his congressional testimony, and he said, flatly, `no,'" Bartiromo said on CNBC. "He said he and his Federal Open Market Committee members were basically trying to create some flexibility for the Federal Reserve, saying the Fed may pause but the data will really dictate whether more rate hikes will occur."

The annual White House dinner is a black-tie affair dating to 1920 that brings together politicians and officials with the reporters who cover them. President Bush, Bernanke, and Supreme Court justices Samuel A. Alito Jr. and Antonin Scalia were among the guests this year.

The CNBC report was unusual because most remarks by Fed chairmen are broadcast live by several television networks, delivered in speeches or in testimony to lawmakers, said Neal Soss, chief economist at Credit Suisse Holdings in New York, who once worked as an aide to Fed Chairman Paul A. Volcker. Such events are generally scheduled at least a week in advance, enabling investors to prepare for them.

Bernanke isn't the first Fed chairman to learn the hard way that his words carry far greater import than before.

Shortly after taking over the reins at the Fed in August 1987, Alan Greenspan appeared on ABC's This Week with David Brinkley program and suggested that inflation could become a problem if consumers and companies thought that it was inevitable. Bond yields rose and stocks fell in response, and Greenspan never gave another television interview on the economy.

Economists expect the Fed to raise its main rate a 16th time, to 5 percent, Wednesday.

The central bank began its run of increases in June 2004, when the rate stood at 1 percent. Futures traders are assigning a 32 percent probability of an increase to 5.25 percent by July. There's a 68 percent chance the rate will rise to 5.25 percent before the end of August, based on the price of futures tied to the fed funds rate on the Chicago Board of Trade.

"Bernanke is finding himself, and he's quickly learning that the market is hanging on his every word," said David Mozina, a currency strategist in New York at Lehman Brothers Holdings Inc. "He's made next week's Fed meeting much more interesting."

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