Anatole Kaletsky accuses Ben Bernanke of being "too clever by half". This is, to my country's shame, a characteristically English insult. And Kaletsky fails to justify it.
Soon after taking the helm at the Fed three months ago, Mr Bernanke decided he would improve on Mr Greenspan’s notoriously convoluted and Delphic statements on monetary policy...Mr Bernanke, by contrast, has tried to dispense with such obfuscation and offer clear guidance on the future direction of interest rates.
However, there's a strong case for greater transparency in monetary policy. In reducing unnecessary uncertainty about monetary policy, risk premia on bonds and shares should be lower. That should benefit everyone. It's hard to see an offsetting cost of greater transparency - though this paper tries to find one.
By adding the single word “yet” to the previous communiqué — “some further tightening may yet be needed” — Mr Bernanke seemed to think he could convey the dual message that the Fed would pause in its rate rises to avoid any danger of an economic slowdown, but simultaneously that it would do whatever was needed to keep inflation under control. In the event, this approach achieved exactly the opposite result — undermining confidence in the dollar and US financial markets.
But markets have suspected for ages that there might be a rate pause at 5% from May onwards; it's pretty much what was in options prices back in March. To any rational person, there should have been little surprise in the statement.
US inflation is now at its highest level for a generation and is creeping steadily upwards.
Insofar as this is the result of monetary policy, it's because policy was too loose under Greenspan. The lags between interest rates and inflation are such that Bernanke's governorship cannot be to blame at all.
If Mr Bernanke decides to stop tightening while inflation is still moving upwards, we could well see financial markets decide to test the new Fed Chairman’s mettle.
But there'll have to come a time when the Fed stops tightening as inflation is rising. This is simply because it takes at least a year for monetary policy to affect inflation*. If you keep raising interest rates while inflation is rising, you'll raise them too high.
Second, financial markets cannot decide anything. They are simply the aggregation of individual actions. And of the countless reasons why an individual might sell bonds or stocks, not one includes a desire to test the Fed's mettle. It's simply wrong to assume to attribute intentionality to groups of atomic actors.
I suspect Kaletsky's argument will be the first of many which compares Bernanke unfavourably to Greenspan. Such comparisons, though, will owe a lot to two biases.
One is the fundamental attribitution error (yes, Bryan, it is sometimes an error). Greenspan had the good fortune to be Fed governor at a time of positive supply shocks, such as the US productivity breakthrough and the supply of cheap goods from China, and macro stability (which is only very partly (pdf) due to monetary policy itself). It's easy to be a good policy-maker in such benign times.
Second, Greenspan erred on the side of easy policy - which might be why inflation's rising now. And cheap money makes lots of friends.
* Sometimes, inflation rises soon after tighter monetary - this is Chris Sims' price puzzle (pdf). I once raised this in a job interview at the Bank of England. I never got the job.