Stock Investors Cheer the Pick
By GREG IP
October 25, 2005
WASHINGTON -- Ben S. Bernanke, an economist virtually unknown outside of academic circles four years ago, was picked by President Bush to succeed Alan Greenspan as chairman of the Federal Reserve Board, the most influential economic policy job in the world.
The announcement represents a curtain call for an extraordinary 18 years in which Mr. Greenspan has guided the U.S. and, to a great extent, global economy -- by most accounts with much success. The transition thus has the potential to roil markets and unsettle investors, many of whom see Mr. Greenspan as a rock of stability for a U.S. economy afflicted by budget and trade deficits, high energy prices and heavy reliance on borrowing from abroad.
Against that backdrop, the Bush administration made what appeared to be a safe choice, for itself and the economy. Mr. Bernanke (pronounced ber-NANK-ee), 51 years old, has been an academic most of his life and represents both continuity and minimal surprise on monetary policy. He was a member of the Fed board of governors alongside Mr. Greenspan from 2002 to this past June, when he became chairman of the President's Council of Economic Advisers.
Mr. Bernanke's monetary policy is likely to look much like Mr. Greenspan's: an emphasis on low inflation as the central bank's primary goal; little appetite for trying to burst stock-market or real-estate bubbles; and monetary policy that relies on data and pragmatism, not ideology. "My first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years," he said yesterday.
In his last several months at the Fed and his short time at the White House, however, Mr. Bernanke has been more sanguine about inflation than some Fed officials. "The stability in core inflation and inflation expectations does suggest that overall inflation is likely to return to levels consistent with price stability in coming quarters," he told the Joint Economic Committee of Congress last Thursday.
Some in the markets say his warnings about the risk of deflation, or generally declining prices, during his early days as a Fed governor suggest he would be soft on inflation. But for most of Mr. Bernanke's Fed stint, inflation wasn't a concern of the markets or the Fed, as it is now.
Moreover, as an academic and a Fed governor Mr. Bernanke has argued that the central bank should have an explicit target for inflation -- both to guide market expectations and to hold the Fed accountable to
its goal of price stability. A target wouldn't necessarily stop inflation from rising, but would make it hard for the Fed to ignore or play down such a risk.
The stock market rose sharply on news of Mr. Bernanke's nomination, though the bond market declined.
Mr. Bernanke is likely to usher in an approach that involves somewhat clearer statements and publicly enunciated rules for moving rates than seen in the Greenspan years. Mr. Greenspan has long relied on his own idiosyncratic understanding of economic data, his discretion to move rates when he thought necessary, and often opaque pronouncements.
Early reviews of the choice of Mr. Bernanke, whom financial markets had made the favorite, were positive. Bill Dudley, chief U.S. economist at Goldman Sachs Group, called him "highly competent." Nariman Behravesh, chief economist at forecasting firm Global Insight, said the choice will "reassure global financial markets." Sen. Edward Kennedy, the Massachusetts Democrat, deemed him "certainly well- qualified."
Mr. Greenspan, who the White House said participated in the selection process, gave his blessing, citing the nominee's "academic credentials and important insights into the ways our economy functions."
But Mr. Bernanke faces many challenges, not the least of which is simply having to fill Mr. Greenspan's large shoes. It isn't clear how well Mr. Bernanke's academic grounding -- he used to head Princeton's economics department -- has prepared him for handling the financial crises that periodically erupt, such as a stock-market crash or a run on the dollar. (See an interactive graphic showing how employment, interest rates, inflation and stocks have fared during the Greenspan era.)
Though his recent move to the White House from the Fed may have helped him get Mr. Bush's nod, it adds to his challenges. The Senate is likely to scrutinize his views on deficits and tax cuts for any differences of nuance between what he says now and what he said while serving Mr. Bush. Mr. Bernanke's recent stint at the White House could limit his ability to speak publicly as Fed chairman, since any perceived echoing of the White House line might provoke accusations that he isn't independent.
Mr. Greenspan, who speaks frequently on tax, budget and other economic issues outside the Fed's purview, also once served as chairman of the President's Council of Economic Advisers, under Gerald Ford. But he didn't move directly from there to the Fed.
With Mr. Bush under fire for seeming to some people to place too high a value on loyalty, Mr. Bernanke may find it necessary to prove his political independence. But supporters note that he didn't know Mr. Bush before joining the Council of Economic Advisers and has been far from partisan in the past. Alan Blinder, a Princeton economist whom Bill Clinton named to the Fed, said, "I was his friend, colleague, and co-author for more than a dozen years before I even knew his politics."
As chairman of Princeton's economics department, Mr. Bernanke hired Paul Krugman, now a relentless Bush critic on the op-ed pages of the New York Times. Mr. Bernanke's only political office was serving on the school board of Montgomery Township, N.J. (He pushed to expand the crowded school system, a stance that eventually led to higher property taxes.)
Sen. Charles Schumer, a New York Democrat and member of the committee that will weigh the nomination, yesterday said he had told Mr. Bernanke by phone that the next Fed chairman should be "a cheerleader or jawboner to prevent our deficit from getting any worse." The senator said Mr. Bernanke replied that "at the Fed he would not comment on non-monetary matters," a stance that some inside the Fed would welcome.
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