With a 5.6% rate of GDP growth in the first quarter of 2006 and a rosy outlook for the second quarter, what could there have been to worry about? Our new Fed chief, Ben Bernanke, had long espoused greater transparency in Fed policy, and the early statements from the post-Greenspan Federal Reserve indicated that he was committed to following through on that plan. Even in the waning days of Mr. Greenspan’s tenure, expectations were zeroing in on perhaps another couple of quarter-point hikes in short-term rates and anticipation that, by mid-2006, the nation’s central bank may be content to stand pat. Official statements by the Fed and comments from Bernanke himself in April and early May appeared to suggest that the cycle of rate hikes might reach its conclusion in the short term.

At a White House dinner shortly thereafter, Bernanke apparently confided to a financial markets reporter — perhaps on or perhaps off the record — that the market had clearly misread his congressional testimony from the prior week and that its optimistic response was off base. When those comments were reported publicly the following Monday, the market reaction was immediate and decidedly negative.

Shortly thereafter, the equity markets commenced on a five-week plunge that wiped out substantially all of the formerly robust gains for the year. The S&P 500 demonstrated the most resilience, surrendering a comparatively modest 7.5%. Small cap and international stocks both posted substantial declines, as the Russell 2000 and EAFE indices each dropped about 13.9%. A moderate rebound in the closing weeks of June allowed investors to reclaim a portion of those losses, but the major U.S. market indices remained in negative territory for the quarter. Despite the selloff, international stocks managed a fractional gain for the period.

To be sure, the current volatility in the markets cannot be laid completely at the feet of a still-green central banker learning on the job. He didn’t create the underlying uncertainty, although he hasn’t done much to alleviate investor anxiety either. In his recent statements, Bernanke has noted that the economy is in a “period of transition.” Specifically, the rate of domestic economic growth appears to be ready to down-shift at the same time that inflation may again be flaring.

In a speech at the International Monetary Conference in early June, Bernanke noted that the nation’s core inflation rate is at a point that “…if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth.” Despite the Fed’s two-year tightening of monetary policy, inflation appears indeed to be gathering strength, primarily as a result of rising energy and housing costs. The Consumer Price Index (CPI) increased at a 4.2% rate year-over- year through May. Even removing the impact of more volatile food and energy costs, Core CPI was up 2.4% over the same period. While there is a lag between any rate increase and its desired effect, concern is mounting that further rate hikes may be needed to rein in current inflationary pressures.

As a practical matter, Alan Greenspan claimed no additional power to control the markets than his successor. Recognizing this inability to snap his fingers and order a remedy, he could at least confuse investors to the point of inactivity. Careers were built by individuals who tried to decipher his statements and predict the direction of Fed policy, often with limited success.

Many market observers cheered after Bernanke was confirmed as Greenspan’s successor, not only for his experience and intellect, but because they believed in his desire to bring greater transparency to monetary policy. That couldn’t be a bad thing, could it?

Be careful what you wish for. Some ambiguity in “Fedspeak” might not be such a bad thing. Certainly, a little obfuscation would be preferable to the “clarity” that has done little to appease the markets of late.