Reading the Fed Bernanke-Style

In his speech at the Economic Club of New York Monday night, Federal Reserve Chairman Ben Bernanke gave no indication that the Fed was about to end its interest rate hikes, making it very clear that future policy changes remained data dependent.

To the bond market, which has predicated its recent rally on the possibility that the Fed might soon signal an end to rate hikes, and where speculative positions have recently grown to a record high, prices might now begin to fall again, unless upcoming data alter the equation.

Stylistically, Bernanke chose a delivery that was very different from predecessor Alan Greenspan, and one which may not necessarily yield the clarity that market participants are expecting from the Fed under the new chairman. Bernanke's approach was abundantly clear in both the beginning and end to his speech.

In the very first paragraph, for example, Bernanke added a qualifier that you would never find in a Greenspan speech:

"I should say at the outset that the views I will express are my own and are not necessarily shared by my colleagues on the Federal Open Market Committee (FOMC)."

By adding the qualifier, Bernanke made it clear that he would be a chairman that would seek to ignite an open debate and that a consensus on the FOMC would be formed around the debate.

This is a big change from Greenspan's tenure, where the chairman would lay out his views and seek to build a consensus from there. These differences could actually result in less transparency under Bernanke because market participants would have to interpret for themselves which way the debate might swing. Under Greenspan, investors would take his comments at face value and expect that policy would be in a continuum when expressed by others on the FOMC.

Bond Market's 'Ambiguous' Policy Implications

Bernanke said at the end of his speech that "... in the current situation, the bottom line for policy appears ambiguous."

He said as much because, as he told us earlier in his speech, there are a variety of explanations as to why long-term interest rates are low. In describing the ambiguities and uncertainties regarding the information contained in the low level of long-term interest rates, Bernanke opened the floor for debate and laid out the issues to be discussed at the upcoming FOMC meeting, doing so without giving a hint at what might be decided. Unlike Greenspan, Bernanke would rather let the FOMC form a consensus around the debate rather than his own views.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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