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Sometimes there's a downside to speaking too clearly in politics, diplomacy and economics

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WASHINGTON - For U.S. policy makers, events that seem at first like positive developments can sometimes unexpectedly bite back.

When federal budget deficits finally began to shrink in early spring as recovery from the Great Recession advanced, economic growth started inching down — not up.

And when Federal Reserve Chairman Ben Bernanke suggested last week that continued economic gains might allow the central bank to begin withdrawing financial life supports "later this year" — a statement that sounded like good news — it triggered a multiday sell-off in the stock and bond markets.

It's not just economic policy. Foreign policy under President Barack Obama also hit a few recent snags.

While in Europe, Obama reached out to Russia to negotiate new reductions in the nuclear arsenals of both countries — and drew a quick rebuff from Moscow. Obama also welcomed a new initiative for peace talks with Afghanistan's Taliban militants. But Afghan President Hamid Karzai renounced the formula the next day and refused to participate in the talks.

"We had anticipated that at the outset, there were going to be some areas of friction, to put it mildly, in getting this thing off the ground," Obama said of the Taliban outreach.

The episodes serve as a reminder of how tricky negotiating both economic and foreign policy can be in a complex and interconnected world, rife with political challenges at home and overseas. And that in economics, diplomacy and politics, speaking too clearly sometimes has a price.

Obama has little room to manoeuvr domestically given harsh partisan divides in Congress. And there is scant appetite in either party — or money in government coffers — for expensive new fiscal initiatives to further spur growth and job creation.

The previous two Fed chairmen — Alan Greenspan and Paul Volcker — often seemed deliberately obscure when discussing Fed strategy. It wasn't always clear what they meant, but their public comments rarely triggered huge market selloffs either. Bernanke has made a point of being transparent.

"We are determined to be as clear as we can," he said last week at one of his regular news conferences.

Wayne Fields, an expert on political and presidential rhetoric at Washington University in St. Louis, said the issue of how candid to be and how much to disclose is a problem for presidents and Fed chairmen alike, one intensified by the recent debate over government secrecy and surveillance.

"Both foreign policy and domestic policy are interacting in really complicated ways around these issues, where things so quickly get out and where things so quickly get revealed," Fields said. "What should we allow government to keep quiet? What level of clarity and precision do we expect? All information is vulnerable and up for grabs."

Some of the improved deficit picture is due to rising tax revenues from recovery-driven corporate profit increases. But a lot also stems from tax hikes on wealthier Americans approved during "fiscal cliff" negotiations in late December and automatic "sequester" spending cuts that kicked in March 1.

The lower deficit sounds good, but it already has hurt fragile economic growth, private and government economists say. After the gross domestic product rose by 2.4 per cent from January through March, GDP growth started slipping and is expected to be an anemic 1 per cent to 2 per cent in the current three-month quarter that ends June 30. The unemployment rate remains a high 7.6 per cent a full four years after the Great Recession ended.

The Fed under Bernanke has kept interest rates super-low for five years and created roughly $3 trillion in new money for a bond-buying program intended to reignite business activity and keep mortgage and other long-term rates down. Now the Fed is seeking a gradual way to quit the money-printing business without endangering the recovery or awakening long-tame inflation.

While meant to be reassuring, Bernanke's words on ending the Fed's financial stimulus helped fuel concern among investors that the U.S. economy still was not strong enough to survive without the central bank's stimulus. That's what triggered the market selloff. Market turmoil, if it continues, could set back the recovery.

Obama's clout in Congress will lessen even further the closer he gets to lame-duck territory. And Bernanke seems something of a lame duck after Obama noted publicly last week that it may be time for the chairman to step down when his current term ends in January.

The former Princeton University economist "has already stayed a lot longer than he wanted or he was supposed to," Obama told TV interviewer Charlie Rose. Obama reappointed Bernanke for a second term as chairman in 2010. Bernanke seems to be quietly signalling that he's prepared to leave, but declines to discuss it publicly.

"I think what Bernanke wants to do is lay out a clear path to how to get it done (withdrawing the Fed stimulus) before he leaves," said Mark Zandi, chief economist for Moody's Analytics. "I don't think he's going to have enough time. But he'll want to lay out a clear road map for everybody."

As for the economy, "I think odds are it will get better," Zandi said. "But the script is still being written."


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