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No more loose lips for Fed chairman

Ben Bernanke says he had a "lapse of judgment" when he made remarks to a CNBC reporter that caused the stock market to slump.

By ASSOCIATED PRESS
Published May 24, 2006

WASHINGTON - Federal Reserve Chairman Ben Bernanke said Tuesday he suffered a "lapse of judgment" when talking to a CNBC reporter recently, a conversation that caused the stock market to tank when his comments were reported.

Sen. Jim Bunning, R-Ky., asked Bernanke about the episode during a Senate Banking Committee hearing on financial literacy.

"Senator, that episode you refer to was a lapse of judgment on my part," Bernanke replied. "In the future, my communications with the public and with the market will be entirely through regular and formal channels."

Bernanke took over the Fed job on Feb. 1. In a congressional appearance on April 27, he raised the possibility of the Fed's pausing its two-year credit-tightening campaign. Stocks rallied that day.

But on May 1, CNBC reported that Bernanke had told CNBC reporter Maria Bartiromo that investors had misinterpreted his recent congressional remarks as an indication that the Fed was nearly done raising rates. Stocks - which had been up for most of the day - slumped.

Besides raising questions about Bernanke's communications skills, the incident underscored the fact that a single word uttered by a Fed chief can move stock and bond prices.

At Tuesday's hearing, Bunning, who opposed Bernanke's nomination as Fed chief, said, "I warned you to be careful about what you say because people are going to follow your words very closely."

Bunning also took issue with the Fed's decision to push interest rates higher to fend off inflation. The Fed's last rate hike, on May 10, left a key rate at a five-year high of 5 percent. It marked the 16th increase since June 2004.

Bernanke defended the action. He pointed out that he and his Fed colleagues at the May meeting noted that there were some inflation risks to the economy. In terms of the Fed's next rate decision in late June, though, Bernanke said the Fed will rely heavily on what incoming barometers say about inflation and economic activity.

Between now and then, "we'll be watching that data very carefully," Bernanke said.

The exchange came at a hearing focused on financial literacy. The Fed chairman told the panel that sharpening Americans' financial know-how and skills is crucial to consumers' ability to make smart money choices and is also good for the overall economy.

Consumers with the necessary skills to make informed financial decisions about buying a home, financing an education or their retirement, or starting a business will almost certainly be economically better off than those lacking those vital skills, Bernanke said.

Bernanke said he thinks competition is the best way to promote the provision of better, cheaper financial products to consumers.

He said research shows that financial education and credit counseling can help people make better choices. That's important not only for adults but also for teaching young people the basics of making good financial decisions, he said.

But young people are flunking when it comes to their understanding of basic financial matters, research shows.

On average, high school seniors answered correctly only 52.4 percent of questions about personal finance and economics, according to a nationwide survey released in early April. Still, that was a smidgen better than the 52.3 percent in the previous survey in 2004 and was up from the lowest-ever score of 50.2 percent in 2002.

The surveys, which are done every two years, were sponsored by the Jump$tart Coalition for Personal Financial Literacy, which wants students to have the skills to be financially competent.

[Last modified May 24, 2006, 05:44:23]