Surowiecki to Bernanke: Don't shut up

What’s wrong with Ben Bernanke’s openness, asks James Surowiecki in the latest New Yorker. Here's an extract from his piece, Too Much Information:

...Will Bernanke please shut up? Let’s hope not.

While Bernanke’s attempt to open the doors of the Fed wider has had a rocky start, it’s the logical next step in a welcome trend toward transparency that started under Greenspan. Until recently, the Federal Reserve’s operations were hidden from the public, so successfully that, in 1981, the Fed beat back a Freedom of Information Act lawsuit, asserting that secrecy was indispensable to its operations. The idea that central banks should keep their discussions from the view of mere mortals—known among economists as “monetary mystique”—was seen as fundamental to proper management of the economy. And theorists believed that, for maximum effect, the Fed’s decisions ought to come as a surprise.

Over the past twelve years, though, the Fed has been disclosing more information. In 1994, it began announcing publicly whether it had decided to raise interest rates. (Before then, the market simply had to figure out on its own what the Fed was doing.) In 1999, it started including in its statements language that laid out its appraisal of the current state of the economy. And in 2004 it sped up the release of the minutes of its meetings. Few, if any, investors thought these moves were ill-considered. So why does Bernanke’s penchant for openness have everyone so agitated?

In part, people are worried simply because Bernanke is replacing one of the best central bankers in history. But their anxiety has been aggravated by the perception that Bernanke has been inconsistent in his commitment to fighting inflation—the Fed’s fundamental task. Instead of taking a single inflexible position, Bernanke has offered a nuanced take on whether inflation is becoming a serious problem and on how high the Fed might need to raise interest rates to stop it.

At one point, hesuggested that the Fed—which has raised interest rates at seventeen straight meetings—might pause before raising them again. But on a later occasion he said that inflation was edging into a range that made him uncomfortable. These are reasonable statements by a policymaker adjusting interpretations to fit new data. But they’ve been read as the meanderings of a hopeless waffler. Bernanke was first excoriated for being too soft on inflation and is now being criticized for being too tough.

Bernanke has not always been judicious—one of his market-moving statements was an off-the-cuff comment to Maria Bartiromo, of CNBC, at a dinner—but his reputation for flakiness is undeserved. All Fed chairmen have had the experience of seeing markets overreact to their statements. A recent study by two former Fed employees shows that, more than once during Greenspan’s tenure, his comments moved the market more sharply than Bernanke has.

Furthermore, Bernanke is trying to navigate the economy during a period of tremendous uncertainty. Traditional measures of inflation are high, but wages are barely growing, which indicates that inflation will remain under control. There’s also the slowdown in the housing market to consider, and the uncertain impact of our huge budget and trade deficits. Under these conditions, only a dolt would adopt a simple message like “We’re going to keep raising interest rates.”

But acknowledging uncertainty doesn’t play well with the media or the market. Today, the Fed’s actions are subject to constant press scrutiny. And it’s easier to lure audiences by using labels like “hawk” and “dove” than by exploring the subtleties of forecasting an uncertain future. In theory, investors should look past the headlines to the substance, but if the multitudes are treating the headlines as important news it’s hard for any individual investor not to do likewise.

So, for now, one of Bernanke’s great strengths—comfort with the uncertain nature of monetary policy—is seen by the market as a weakness. As social scientists have long recognized, we prefer confident statements of fact to probabilistic statements, even when we know that the confidence is illusory. And while Greenspan was also comfortable with uncertainty, his impenetrable rhetoric made it easy to believe that, underneath all the caveats, he really was certain. The less Greenspan said, the more people assumed he knew.

Should Bernankework on his incoherent mumbling? That cure would be worse than the disease. Bernanke’s initial instinct was the right one. Markets may mess up in the short run, but they learn in the long run. A recent study by the Federal Reserve Bank of Cleveland, for instance, found that the Fed’s greater openness since 1999—when it started explaining its decisions and its expectations for the future—has significantly reduced the mistakes that investors make in predicting what the Fed will do, with the result that markets have been less volatile and less risky. People may want to be kept in the dark, but they’re ultimately better off when the Fed sheds more light.

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