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EDITORIALS: THE SATURDAY PAGE | COMMON CURRENCY

The Fed's cred

June 17, 2006

LIKE NANCY REAGAN OR FANS of the Chicago Cubs, people who work on Wall Street are always on the watch for omens. So it's no wonder that so many hang on every sniffle, twitch and gulp from new Federal Reserve Chairman Ben S. Bernanke. Nor is it surprising that some blame him for the market's recent gyrations.

But it is silly. A Fed chief's currency is his credibility -- and the new chief and the markets have had some miscommunication. When Bernanke testified to Congress in April that the Fed might pause in its policy of raising interest rates, the market responded with a small rise. An offhand (and ill-advised) remark later that month to CNBC reporter Maria Bartiromo that investors had misinterpreted his remarks had the opposite effect.

This week, Bernanke didn't say much, leaving investors to comb through inflation numbers to surmise whether the Fed's policy committee would raise rates later this month. The data proved almost as enigmatic as, well, a chairman of the Federal Reserve; after a midweek rally, the markets ended the week on a mixed note.

Fretting Fed watchers forget that early-term troubles are normal. Paul A. Volcker faced inflation rates higher than 10% for more than a year after he started the job in 1979. Even Alan Greenspan didn't become a mythical sage overnight, enduring the worst single day in the history of the stock market shortly after he took office in 1987.

Wall Street seems to want Bernanke to be just like Greenspan -- but also to strike out on his own with a more detailed, clear style. Good luck. A more reasonable scenario might involve investors meeting the new chairman halfway, adjusting to his style as much as they expect him to adjust to theirs. Compounding the challenge, Bernanke has to figure out how to rein in inflation without bringing the economy to a halt. That's a tall order that hinges on factors no individual, not even a Fed chief, can control.

It all begs the question: Do the markets (and all of us) care too much about what the Fed chairman says? N. Gregory Mankiw, an economics professor at Harvard and former chairman of the White House Council of Economic Advisors, thinks so. He argues that monetary policy is a team effort, not the doings of any "inscrutable wizard."

His advice to Bernanke? "Become as boring a public figure as possible," he said in a recent paper. If the chairman of the Fed were less prominent, he wrote, the public might start to believe "that the institution matters more than the individual who happens to be leading it at the moment."

Getting that kind of quiet message across might be a Fed chairman's greatest miracle to date.

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