Bernankeology

Why so much is read into the words of the Fed chairman.

Following Fed chairman Ben Bernanke's speech yesterday, the usual bout of trying to understand quite how much we can read in to his words has begun. Yet unlike the normally perjorative "Kremlinology" – attempting to infer things from the most minuscule turns of phrase – this Bernankeology is understandable and quite useful.

Central bankers have a strange job. They don't actually have many tools at their disposal; largely just the tripartite decision to raise, lower, or maintain interest rates. Yet many of the outcomes they create come, not from actually using this power, but from creating expectations as to their future use.

Suppose Bernanke knows he is likely to raise interest rates in the first quarter of 2013. Even though his actual power is relatively limited, he can create a wide spectrum of outcomes depending on how he announces this. The market reaction will be extremely different if Bernanke says now that he will raise rates in a years time, compared to if he maintains right up until the day that a rate rise would be inappropriate.

But this power to persuade brings with it its own problems. Just like a legislature, a central bank is fundamentally unable to constrain itself; it can make promises, but everyone knows that it is free to break them at any point.

All of this means that every speech Bernanke gives is likely to be very carefully aimed at creating just the right set of expectations. On the one hand, he can't ever gain a reputation for untrustworthiness, so they have to be scrupulously honest; on the other, actually saying what he believes may create the wrong impression.

Last week, Ryan Avent provided a detailed breakdown of exactly what the benefits of Bernankeology can be, focusing on the Fed's "forward guidance" where it hinted that it would keep interest rates low until at least 2013. He writes:

On the one hand, a pure focus on the language of the Fed's statement indicates that rates are likely to remain low through that period based on the state of the economy... On the other hand, the Fed may be hinting that it will be willing to keep rates low through late 2014 even if the trajectory of the economy warrants a rate increase.

In other words, the Fed might be attempting to commit itself to a deviation from its normal policy rules of the sort that might generate more rapid growth and inflation.

The problem the Fed has is that it needs to generate growth, but that growth is likely to come with relatively high inflation, of the sort which Bernanke has historically fought against. In order to help the economy, he needs to convince "the markets" that interest rates will be kept low even if inflation spirals out of control. The problem is that this, from an inflationary hawk like Bernanke, is unbelievable.

Avent points to a paper (pdf) which breaks down the distinction into two categories:

Delphic, corresponding to the first category above, and Odyssean, corresponding to the second, in which the central bank attempts to commit itself to deviations from typical rules.

Matt Yglesias offers a less refined version of the same strategy, breaking Bernanke's possible responses into an Eeyore response and a Tigger one. Either the Fed chief can "avoid optimistic forecasts as a way of signaling that rates will stay low for a long time," or he "can say we're climbing out of a steep hole so rates will stay low for the next 18 months come what may".

The test for Bernankeologists is to work out whether yesterday's gloomy speech is Odyssean-Eeyore, using gloominess as a mast to bind himself to, or simply Delphic, with the chairman making his most honest predictions and still being pessimistic.

Occupy LA activists march against the Fed in November. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Goodbye, Sam Allardyce: a grim portrait of national service

In being brought down by a newspaper sting, the former England manager joins a hall of infamy. 

It took the best part of 17 years for Glenn Hoddle’s reputation to recover from losing the England job.

Between leaving his job as manager in February 1999 and re-surfacing as a television pundit on ITV during the 2014 World Cup, Hoddle was English football’s great pariah. Thanks to his belief in faith healer Eileen Drewery and a string of unconventional and unacceptable views on reincarnation, he found himself in exile following in a newspaper interview during qualification for England’s Euro 2000 campaign.

But just as Hoddle is now cautiously being welcomed back to the bosom of English football, current incumbent Sam Allardyce has felt the axe fall. After less than two months in charge of the national side and with only a single game under his belt, the former Bolton Wanderers manager was caught up in a sting operation by the Daily Telegraph — allegedly offering guidance on how to circumvent his employer’s rules on third-party player ownership.

The rewards for guiding an English team to major international success promise to be spectacular. As a result, the price for any failure — either moral or performance-related — is extreme.

Hoddle’s successor – the endearing Kevin Keegan – resigned tearfully in a toilet at Wembley after a tumultuous 18-month spell in charge. His replacement, the laconic Sven-Göran Eriksson, provided moments of on-field excitement paired with incredible incidents of personal indiscretion. His tangle with "fake sheikh" Mazher Mahmood in the run up to the 2006 World Cup – an incident with haunting parallels to Allardyce’s current predicament – led to a mutual separation that summer.

Steve McClaren was hapless, if also incredibly unfortunate, and was dispatched from the top job in little over a year. Fabio Capello – who inspired so much optimism throughout his first two years in charge – proved himself incapable of lifting the hex on English major tournament fortunes.

The Italian’s star was falling from the moment he put his name to the oddly timed Capello Index in 2010, although his sustained backing of then captain John Terry over a string of personal misdemeanours would prove to be the misjudgement that ultimately forced his exit. As Allardyce has found out, the FA has become increasingly hard on lapses in moral judgement.

English football is suffused with a strange mix of entitlement and crushing self-doubt. After a decade that has given us a Wimbledon champion, several Ashes triumphs, two Tour de France winners and eye-watering Olympic success, a breakthrough in this area has never felt further away.

In replacing Capello, Roy Hodgson — the man mocked by Allardyce during his hours supping pints with Telegraph reporters — had hoped to put a rubber stamp on a highly respectable coaching career with a spell managing his own country. But this summer’s farcical defeat to Iceland at Euro 2016 put his previous career in a much harsher light.    

Allardyce was a mix of the best and worst of each of his predecessors. He was as gaffe-prone as Steve McClaren, yet as committed to football science and innovation as Hodgson or Capello. He also carried the affability of Keegan and the bulldog spirit of Terry Venables — the last man to make great strides for England at a major tournament.  

And as a result, his fall is the most heartbreaking of the lot. The unfairly decried charlatan of modern football is the same man who built a deeply underrated dynasty at Bolton before keeping Blackburn, West Ham and Sunderland afloat in the most competitive league in Europe.

And it was this hard apprenticeship that convinced the FA to defy the trendy naysayers and appoint him.

“I think we make mistakes when we are down here and our spirit has to come back and learn,” Hoddle mused at the beginning of his ill-fated 1999 interview. As the FA and Allardyce consider their exit strategy from this latest sorry mess, it’s difficult to be sure what either party will have learned.

The FA, desperately short of options could theoretically turn again to a reborn Hoddle. Allardyce, on the other hand, faces his own long exile. 

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