In the Ring With the Fed

Under the Greenspan Fed, there might have been a greater chance for the FOMC to cut interest rates. After all, the maestro was criticized as being a slave to market expectations. This could be one reason why the cottage industry of Fed-watchers was decimated under his tenure, as the uncanny accuracy of the front-month Fed funds futures contract was widely appreciated.

It was not simply that the market became better at reading the Fed. Greenspan's circuitous verbal jousting, the embrace of strategic ambiguity as a matter of principle and his ad-hoc approach to the conduct of monetary policy arguably mitigated some of the other forces working toward greater transparency.

The Bernanke Fed is different. Bernanke is more comfortable with decision-making rules, as reflected in his advocacy of a formal inflation target. While the Bernanke Fed undoubtedly monitors and places weight on expectations, the chairman appears less inclined to follow the market.

If nothing else, this is one consequence of Bernanke's emphasis on greater transparency and clearer communication. There is no doubt where he stands. For the better part of the past six months, the message has been unambiguous and consistent -- not swayed by volatile and frequent pieces of economic data. Strong first-quarter GDP did not prompt a panic response, like a 50-basis-point hike, that some observers favored. Nor did the initial 1.6% third-quarter GDP -- subsequently revised to 2.2% -- cause a panic cut, like some thought necessary.

In the battle for control of U.S. monetary policy, my money is on the Fed and the equity market. The debt and currency markets are too fickle and subject to various other forces that might shape the signal that its prices are generating. However, I would not bet the farm or take the risk of ruin. In the words of the Great Communicator: Trust, but verify.