Tuesday, July 10, 2007

What to Listen for When Bernanke Speaks Today

Today’s 1 PM speech by Fed Chairman Bernanke will be closely watched by most investors for what he says about the direction of interest rates. It may, however, be a more fruitful exercise to listen to what the Chairman says about key issues such as non-bank lenders than the likely non-statement re his views on rate changes. For example, in his last speech given on June 15th, he stated the following:

“Endogenous changes in creditworthiness may increase the persistence and amplitude of business cycles (the financial accelerator) and strengthen the influence of monetary policy (the credit channel). As I have noted today, what has been called the bank-lending channel--the idea that banks play a special role in the transmission of monetary policy--can be integrated into this same broad logical framework, if we focus on the link between the bank's financial condition and its cost of capital. Nonbank lenders may well be subject to the same forces.”

Where Alan Greenspan was noted for his opaqueness (to put it generously), Ben Bernanke, on the other hand, assumed his position as Fed chair promising a more candid and clear spoken view of his positions. Unfortunately, he learned early on that being too candid can produce more problems than benefits. Therefore, being a good student, the professor is a quick study and adjusted his pronouncements accordingly. But to what level of candor has he moved to in his commentaries?

Having read his (and other Fed head) speeches, the sense I get it that Mr. Bernanke likes to frame his views in larger thematic concepts rooted in his theoretical views on how monetary policy should function. For example, in the June 15th speech referenced above, a careful reading reveals that he is keenly aware of the psychological dynamic of investor, corporate, and consumer sentiment and the impact it has on the real and financial economy. In other words, he tempers his ivory tower views with a real world recognition of how markets and economies work.

As I said, when it comes to matters pertaining to interest rate changes, today’s speech will likely be a non-event. Therefore, what should be a more productive use of time is to listen for the larger thematic issues, such as his views on non-bank lenders and unregulated money.

And read between the lines. He may not be Greenspan but he is certainly not loose-lips Ben. There’s lots of info and insight there.

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