Bernanke May Alter Rhetoric, Not Rates After Market Turmoil

BY

Federal Reserve Chairman Ben S. Bernanke may respond to the latest squall in financial markets
the same way he did when turbulence hit four months ago: with a change in words rather than policy.

Bernanke and his colleagues may suggest after their meeting tomorrow that the risks to
economic growth have increased following the rout in stock and credit markets -- just as they
did after their March meeting.

When it comes to their focus on inflation and the outlook for interest rates, their message will
likely be steady as she goes.

``This episode of turmoil is not enough to alter Fed policy,'' says Laurence Meyer, a former Fed governor who's now vice chairman of St. Louis-based Macroeconomic Advisers LLC. He sees the Fed holding its target for the federal funds rate at 5- 1/4 percent through the end of 2008.

By changing what it says, and not what it does, the Fed can show it isn't oblivious to the 7
percent plunge in stock indexes since July 19 and the possible impact that could have on the
economy. At the same time, the Fed can avoid being seen as losing its anti-inflationary zeal or as standing ready to bail out investors.

The risk is that such an approach may undercut financial markets still struggling to recover. It
might also hinder the economy's recovery to growth of 3 percent or so, from a sub-par 2
percent pace in the first half.