Bernanke sees economy in ‘transition’

Part of the reason, they believe, is that Bernanke, who succeeded Fed legend Alan Greenspan on Feb. 1, wants to prove his inflation-fighting mettle, much the same way Greenspan did when he took over in August 1987, pushing through a half-point increase in rates at his first meeting.

Bernanke “is earning his inflation-fighting credentials, which have been questioned on Wall Street,” said Mark Zandi, chief economist at Moody’s Economy.com.

But the outcome could be the same for both men, a risk of overdoing the rate hikes. Greenspan’s half-point increase was blamed for contributing to unease that triggered the Black Monday stock market crash in October of 1987.

But economists said Bernanke is apparently willing to run the risk of raising rates too high because he does not want to let the Fed’s credibility as an inflation fighter, won over two decades, slip away.

“He is sending a very strong signal that it will be important to stop inflationary forces and expectations from building further,” said Lynn Reaser, chief economist at Bank of America Investment Strategies Group.

Part of the problem, analysts said, is that Bernanke has gotten off to a rocky start in terms of communicating his intentions to Wall Street. He first stumbled in testimony before the Joint Economic Committee on April 27 when he raised the possibility that the central bank might pause in hiking rates to assess the impact the earlier increases were having on the economy.

When the markets rallied strongly on the belief that Bernanke was signaling not just a pause but a halt to the two-year rate campaign, the new Fed chairman complained to a reporter at a Washington dinner that he had been misinterpreted. Those comments sent markets plunging when they were reported two days later.

A chastened Bernanke said that any further comments he made would be through “regular and formal channels.”

But his remarks in Monday’s speech caught the markets by surprise, demonstrating that even when Bernanke is using normal channels he can send investors on a roller-coaster ride.

Analysts predicted as long as Bernanke remains worried that the central bank is behind the curve on fighting inflation, interest rates will keep rising.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Stocks end back-and-forth day slightly up New home sales drop as recovery teeters Consumer sentiment improves in December Home resales surge to nearly 3-year high Incomes rise at fastest pace in six months   Pump prices to stay flat over holiday weekend Geithner sees U.S. job growth by spring Home sales surge, boosting recovery hopes Advocates want more for black unemployed States’ jobless funds going ‘absolutely broke’ Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: