Bernake Speech Discussion

The man who wants to be dovish is Federal Reserve Chairman Ben S. Bernanke. His apparent dovishness refers not to matters of war and peace, but to the never-ending battle against price increases.

Bernanke delivered evenhanded testimony Wednesday to the Senate Banking Committee. He made all the required noises about judging incoming economic data and being vigilant about making sure people's expectations for inflation don't get out of hand. This is not dovishness at any cost.

But when it comes to tone and intent, you could find support (as the U.S. stock market clearly has) for the view that Bernanke would rather the Fed pause in its rate-raising campaign and see whether they've already done enough tightening to do the trick. The greatest evidence of Bernanke's proclivities is his emphasis on the lag between Fed policy actions and their impact on economic growth and inflation.

"The full influence of policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth," Bernanke said in his prepared remarks.

Combine that with Bernanke's notion that economic growth is moderating and you have reason to believe a downtick in the inflation rate is coming. That creates the space to pause and leave the federal funds rate unchanged at 5.25% at the next rate-setting meeting on Aug. 8.

The dovish view expressed Wednesday also reinforced the tone of the Fed's statement made after the last policy meeting in late June. At that time, the Fed agreed on its 17th straight quarter-point interest rate increase.

At that time the Fed said "ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained."

If you accept this essential dovishness, what do you make of the much more hawkish talks Bernanke and some of his Fed colleagues made in the weeks leading up to the June meeting?

You could argue that the evidence of economic growth deceleration, bringing with it the promise of reduced inflationary pressures, had not materialized as fully as now.

You could speculate that to some degree those comments were strategic, consciously designed to fight the perception that Bernanke might be "softer" on inflation than his predecessor.

If such a notion of inappropriate dovishness broadly took hold it could undermine that hard-won battle for low long-term inflation expectations of most in the market and in the broader public. It's a fight the Fed can't afford to lose.

But if some of those comments were in fact strategically designed, it signals a dangerous game in its own right. Confusing traders and analysts should be avoided by the Fed as much as humanly possible. And many have been confused.

In the simplistic version, Bernanke went from dovish to hawkish and now is dovish again. Sure, he was trying to explain a changing and particularly tough point in the economic cycle for monetary policy, with crosswinds of slower growth but still-significant inflationary factors, such as high oil and commodity prices.

Now, between the June Fed meeting and Wednesday's testimony, the message has been consistent: moderately dovish.

Absent any paradigm-changing data between now and Aug. 8, consistency would call for the Fed to leave rates unchanged. The Fed should then use the end-of-meeting statement to reiterate that such a pause in no way ties policy makers' hands at meetings later this year if inflationary pressures stay stronger than anyone wants or that the Fed now expects.