The New Guy
Alan Greenspan is on the way out at the Federal Reserve, but his policies may live on in Ben Bernanke
The financial markets got in Ben Bernanke what they wanted in a Federal Reserve chairman: an expert on monetary policy, an independent and experienced policymaker, a cautious inflation fighter--in sum, a sure hand on the economy's tiller.
And in his first remarks after being nominated by President Bush, Bernanke sounded the tone of an Alan Greenspan clone. "My first priority," he said during his brief acceptance speech in the Oval Office, "will be to maintain continuity with the policies and policy strategies established during the Greenspan years."
Federal funds futures contracts, which indicate market expectations about future monetary policy, signaled belief by not changing on news of the nomination. Yet funds contracts predict only the next six months. Though a Bernanke Fed will initially be indistinguishable from the Greenspan variety, eventually Bernanke's personality and methodology will assert themselves.
One area where that's likely to happen is in Bernanke's approach to inflation. He is an outspoken advocate of inflation targeting, picking an optimal long-run inflation rate and setting policy accordingly. The concept, embraced by the European Central Bank, the Bank of England, and others, is viewed by some as a way to help financial markets price long-term bonds and other assets more efficiently. That, in turn, lowers inflation expectations and keeps price increases in check. Green-span favored a more flexible approach, and there will be much discussion in the weeks to come about what any move toward targeting might mean for the markets.
Bernanke, who will turn 52 in December, enters the job (an easy Senate confirmation is expected, though he will be grilled about his role as chief economic adviser to Bush) armed with impressive credentials. Modest, plain-spoken, and, according to colleagues, very open-minded, he did groundbreaking research on the holy grail of economics, the cause of the Great Depression, before heading up the economics department at Princeton University.
Politically savvy. Appointed by Bush in 2002 to serve on the Fed's board of governors, he quickly established himself as a resident intellectual and made a name outside the central bank with strong opinions about the dangers of deflation. As to Washington politics, an important part of the Fed chief's job, Bernanke has shown good instincts in making White House connections, though his new job also requires that he establish rapport with Capitol Hill.
Initial applause aside, the markets will also be a demanding customer. "Mr. Bernanke will have to earn his anti-inflation stripes," warns Ian Shepherdson of High Frequency Economics. And he will have to continue defending the notion that it is not the Fed's role to avoid asset bubbles. Bernanke espouses the same benign neglect toward bubbles as Greenspan (who has been criticized for allowing the stock market boom of the late 1990s to run too long).
Then there is the bugaboo of inflation. Consumer prices were 4.7 percent higher in September than a year earlier, the biggest annual rise since 1991. Soaring home prices in certain markets, elevated energy prices, and global trade imbalances round out the agenda for a man who will now occupy the world's most important economic policy post.
Following the legend of Greenspan, Bernanke certainly has big shoes to fill. But then so did the great man himself, when he replaced the towering figure of Paul Volcker in 1987.
This story appears in the November 7, 2005 print edition of U.S. News & World Report.
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