Bernanke on the Record
By Kim Rupert
On Oct. 24, President George W. Bush tapped Ben Bernanke, the chairman of the Council of Economic Advisors, to succeed Alan Greenspan as Federal Reserve chief. Bernanke is a specialist in monetary policy, with a Bachelor's degree in economics (summa cum laude) from Harvard and a Ph.D. in economics from MIT.
What else should investors know about him? Below, Action Economics provides a "cheat sheet" of his comments from speeches during his tenure as a Fed governor. This collection should help dispel market concerns that he will seek to follow a strict inflation rule, or that he is a policy dove. After all, while Bernanke made a name as the Fed's point man on deflation back in 2003, this is 2005, with its own set of worries (see BW Online, 10/24/05, "No White House Yes Man").
Bernanke's public positions on many issues are similar, at least on the surface, to those of the exiting Greenspan (see BW Online, 10/24/05, "Economists' Take on Bernanke"). Here's a look at his views on key topics:
Much has been made of the chairman-designate's stance that the central bank should maintain a targeted inflation rate. We start with his comments on a de facto Fed inflation target from a Minneapolis Fed interview in June, 2004: "My main suggestion is to take the natural next step and to give an explicit objective, that is, to provide the public with a working definition of price stability in the form of a number or a numerical range for inflation."
"From a communication point of view, financial markets would be well served by knowing the medium- to long-term inflation objective of the Fed."
"I don't advocate a strict inflation-targeting regime that attempts to maintain inflation at the target level all the time. But I still think it would be useful additional information to know what the Fed's objective is at a medium-term horizon."
"What I have in mind here is not a formal inflation target but rather a tool for aiding communication. The main purpose of this quantification of price stability would be to provide some guidance to the public and to financial markets as they try to forecast FOMC behavior."
"I am in favor of making greater use of the FOMC's central tendency forecasts for communication.... The FOMC should release more information (i.e., longer forecast horizons) about our view" on the economy.
AN IMPLICIT MINIMUM.
Perceptions that Bernanke is dovish on inflation should be offset by his comments from "Constrained Discretion and Monetary Policy" (February, 2004): "The essence of constrained discretion is the central role of a commitment to price stability. Not only does such a commitment enhance efficiency, employment, and economic growth in the long run, but -- by providing an anchor for inflation expectations -- it also improves the ability of central banks to stabilize the real economy in the short run as well. An important and interesting implication is that, under a properly designed and implemented monetary policy regime, the key social objectives of price stability and maximum employment tend to be mutually reinforcing rather than competing goals.
From "Inflation Targeting: Prospects and Problems" (October, 2003): "[I]n general, the OLIR [optimal long-term inflation rate] will be greater than zero inflation, correctly measured.... [I]t may be the case that something in the vicinity of 2% is the optimal long-run average inflation rate for a variety of assumptions about the costs of inflation, the structure of the economy, the distribution of shocks, etc.
From "An Unwelcome Fall in Inflation" (July, 2003): "Although the Federal Reserve does not have an explicit numerical target range for measured inflation, FOMC behavior and rhetoric have suggested to many observers that the Committee does have an implicit preferred range for inflation. Most relevant here, the bottom of that preferred range clearly seems to be a value greater than zero measured inflation, at least 1% per year or so."
"To the extent that one accepts the view that measured inflation should be kept some distance above zero, a very low positive measured rate of inflation (say, 0.5% to 1% per year) is undesirable and implies a need for highly accommodative monetary policy, just as would be required for outright deflation. The language of the May 6 statement encompasses the risks of both very low inflation and deflation."
On this critical topic, which dominated Fed commentary for the first two years of the current expansion, Bernanke makes his views clear in "Deflation: Making Sure "It" Doesn't Happen Here" (November, 2002): "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures."
"Moreover...a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason...prevention of deflation is preferable to cure.... [T]he Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound."
For his views on this approach, which defines what many viewed as Greenspan's earliest major edit to the policy trajectory of his predecessor as Fed chief, Paul Volcker, Bernanke says in "Gradualism" (May, 2004): "Several arguments have been made for the desirability of a gradualist approach to monetary policy.... [T]hree of these [are]: (1) Policymakers' uncertainty about the economy should lead to more gradual adjustment of the policy rate; (2) gradualism in adjusting the policy rate affords policymakers greater influence over the long-term interest rates that most affect the economy; and (3) gradualism reduces risks to financial stability."
For his views on this key market topic, we have "Asset-Price "Bubbles" and Monetary Policy" (October, 2002): "[I]t's extraordinarily difficult for the central bank to know in advance or even after the fact whether or not there's been a bubble.... The central bank should focus the use of its single macroeconomic instrument, the short term interest rate, on price and output stability. It is rarely, if ever, advisable for the central bank to use its interest rate instrument to try to target or control asset price movements, thereby implicitly imposing its view of the proper level of asset prices on financial markets."
Take a look at Bernanke's (admittedly pre-energy price spike) forecast from "The 2005 Economic Outlook" (March, 2005): "In summary, with all the caveats mentioned today firmly in mind, I look for 2005 to be a good year for the U.S. economy: real growth at 3.75% or slightly better, core PCE inflation in the range of 1.5% to 2%, and a slowly declining unemployment rate. Private-sector forecasters are a bit more pessimistic than I am, but not by much. For example, the Blue Chip consensus forecast released yesterday looks for real growth of 3.6% this year, a bit below my projection, and for overall inflation, as measured by the consumer price index (CPI), of 2.2%. If we adjust for the distinction between overall and core inflation and for the fact that, for technical reasons, CPI-based inflation measures tend to be higher than those based on the PCE price index, the Blue Chip inflation forecast is only slightly higher than mine."
"The most important lesson, however, is that the neutral policy rate depends on both current and prospective economic conditions. Accordingly, the neutral rate is not a constant or a fixed objective but will change as the economy and economic forecasts evolve."
Bernanke holds a positive view of the eurozone's experience with a single currency. Look at this from "The Euro" (June, 2004): "... [I]t seems safe to conclude that the common currency has had and will continue to have large benefits for European finance. At a minimum, the single currency eliminates exchange-rate risks that exist when securities are denominated in different currencies. The single unit of account seems also likely to reduce transaction costs and eliminate a portion of the fixed costs involved in issuing similar securities in multiple currencies. These factors are already serving to moderate home bias in borrowing and lending, leading to larger, more liquid, and more diversified financial markets."
In total, the likely new Fed chairman has expressed a relatively nuanced view regarding inflation targeting, even though the topic is now often associated with him. His speeches on deflation, which dominated market chatter a couple of years ago, were hedged with his assertion that there was a low probability of significant price declines affecting the U.S. economy, though he may have contributed to an overemphasis of this concern at the Fed. However, that was the worry in 2003, and it doesn't mean he will be less than attentive to the current round of inflation concerns.
He is supportive of gradualism, skeptical of the using monetary policy to manage financial market "bubbles," optimistic on the economy, and positive on the creation of the euro.
In short, his views on these various topics, at least as expressed publicly, have not deviated significantly from those publicly held by Chairman Greenspan.
Rupert is managing director of global fixed income analysis for Action Economics