Big Ben Bernanke shakes his Money-Maker

At Federal Reserve meetings under Greenspan, the chair would state his recommendations for interest rates. Then the 18 other policy makers would say if they agreed. They usually did. Now when Fed officials debate the interest-rate decision, it’s Big Ben’s booty call. He speaks last. Fed officials say it makes them feel freer to talk about what's on their minds, rather than responding to the chairman's views.

These changes inside the Fed's policy-making body, the Federal Open Market Committee, indicate an important shift under way. For years, the markets hung on every word of Greenspan. It was a sign of his dominance of the Fed, and his habit of embedding clues to the direction of interest rates in carefully crafted, often opaque speeches.

The new chair is trying to depersonalize the Fed by making its decision-making more democratic and easier to understand. Big Ben hopes he will one day be considered as successful as Greenspan and his predecessor, Paul Volcker. Yet Bernanke has long believed the Fed's success depended too much on the "personal preference" of those two men.

Bernanke's early struggles to communicate in his new job have reinforced his belief that markets hang too much on the Fed chairman's choice of words. A comment he made in April, which he believed was misinterpreted, led some to question his anti-inflation resolve. His plan is for the Fed to be more clear about its goals and expectations for inflation and economic growth so the markets don't react so much to his every utterance.

That will be challenging, partly because the Fed he inherited wasn't in obvious need of improvement. Greenspan’s record is enviable. In Bernanke's view, making the Fed more "transparent" doesn't mean talking more, but providing more systematic, specific information, in particular about the Fed's goals and forecasts. This would have several benefits: the public and companies would be less likely to press for higher wages and prices in anticipation of higher inflation. That would make it easier for the Fed to keep inflation low and stable, without wrenching changes in interest rates.

Publishing clearer and more frequent growth, unemployment and inflation forecasts
would also let the markets better anticipate the Fed's interest-rate actions, Bernanke believes. This might mean markets would move less on the particular words in a Fed speech or statement Big Ben's strategy carries risks. If the Fed's forecasts are repeatedly wrong or if the Fed fails to meet its goals, its credibility will be undermined. More info and opinions from the Fed could lead to more confusion, not less.

http://online.wsj.com/article/SB115768107168157210.html?mod=mkts_main_featured_stories_hs