A Plain-Speaking Fed Chief?
By Michael Wallace
Council of Economic Advisers (CEA) Chairman Ben Bernanke is uniquely qualified for the post of Federal Reserve chief, and the Senate Banking Committee hearings acknowledged that on Nov. 15 as part of the formal confirmation process. Senators on both sides of the partisan divide admitted publicly even prior to the hearings that, as a past Fed governor, CEA head, and highly honored and published academic, Bernanke is expected to sail smoothly through the process.
From prominent foundations and institutions, Bernanke earned over nine fellowships (or awards), and he's a member of four top economic associations (or think tanks), as well as the New Jersey Board of Education. He has held six government positions (on advisory panels) and participated in the publication of more than 80 articles, ranging from monetary policy to the Great Depression. Bernanke was in charge of editing seven Macroeconomic Annuals from the National Bureau of Economic Research (1995-2001) and has written three books. Those in Congress who tried and failed to one-up Greenspan will also have their work cut out in attempting to stump Bernanke. Yet Bernanke already appears somewhat more approachable.
Bernanke indicated that he's likely to be less outspoken on issues unrelated to monetary policy than his predecessor and attempted to steer clear of partisan minefields on taxes, the budget deficit, and foreign financing of the current-account gap. As he becomes more comfortable in his role, he's likely to have a more consensual management approach and even allow his self-deprecating sense of humor to leak out on occasion (see BW Online, 11/16/05, "Bernanke: Not Just a Greenspan Sequel").
TRANSPARENCY A WORTHY GOAL.
Transparency and plain speaking are likely to be his hallmarks, rather than obfuscation and jargon, as was evident in his precise, but spare, written testimony. He emphasized that he would scrupulously maintain the Fed's political independence in pursuit of the dual policy mandate of price stability and maximum sustainable growth, which had some positive resonance with the bond market.
Bernanke wasted no time in confirming that his top priority would be "continuity with the policies and policy strategies of the Greenspan Fed." Among those policies would be to ensure that long-run price stability would be maintained to achieve "maximum employment and overall economic stability." In addition, he said Greenspan's flexible approach to risk management would remain a "necessary component of successful monetary policymaking."
Finally, Bernanke claimed that increasing policy transparency was a worthy goal, since it helps anchor inflation expectations and reduces uncertainty and volatility in the financial markets. He warned that transparency would only be counterproductive if it interfered with the act of policymaking itself -- for example, if taken to an extreme such as televising FOMC meetings.
That turned into a segue on inflation targeting -- a topic that he chose to tackle head-on, rather than duck the issue, despite criticism that such a mechanism had led the European Central Bank (ECB) astray. Bernanke said, unlike the ECB's sole inflation target, his approach would reflect the Fed's dual mandate. He noted that an "explicit statement of a long-run objective" is fully consistent with the Fed's current policy approach.
But Bernanke conceded that he would "take no precipitate steps in the direction of quantifying the definition of long-run price stability." Such a move would require further study and "extensive discussion and consultation," he says. Bernanke would propose adoption of such a strategy only if a consensus indicates that it would further enhance the FOMC's dual mandate. He wouldn't propose a change if he thought it would require an alteration of the Fed's policy mandate by Congress.
In discussing the most appropriate measures of inflation, Bernanke said there were perhaps better alternatives to the core consumer price index (CPI) in benchmarking entitlement programs, though he didn't confine himself to any particular measure, such as the core personal consumption expenditure (PCE) price index that Greenspan has endorsed in the past. The question of whether the CPI measure of underlying inflation was an accurate gauge was posed from the standpoint of an inflation target.
In private discussions in advance of the hearings, Bernanke attempted to reassure senators that any new ideas he brought to the Fed would be more of an attempt to institutionalize Greenspan's successes before him. And he followed this reasoning to the letter in his testimony. Rather than a strict ideological commitment to inflation targeting, for example, he discussed the benefits that a target could bring to the institution of the Fed, in terms of transparency and flexibility.
In his somewhat prescient co-authored piece, "What Happens When Greenspan Is Gone?" published in the Wall Street Journal back in January, 2000, Bernanke and his peers staunchly defended inflation targeting as "the best bet" to "commit the central bank to a forward-looking pursuit of low inflation" and improving openness and accountability at the Fed.
They suggested the ingredients were a public numerical target near 2% over a two-year time horizon, with regular updates on its rationale for meeting and/or deviating from the target for a time, similar to the Bank of England's policy. These would include regular inflation reports that would explain how the Fed planned to get back on track if waylaid by financial or external shocks.
The main goal, Bernanke and his peers argued, is to "depersonalize and institutionalize" the Greenspan legacy. By increasing transparency, inflation targeting would reduce policy volatility, as market uncertainty was diminished. Moreover, the target commits the Fed to both a ceiling and a floor on inflation, providing an insurance policy against deflation as well.
Answering the charge leveled by some critics that he lacks financial-market experience, Bernanke promised to "work to enhance the stability of the financial system and to ensure that the resources, procedures, and expertise are in place as needed to respond to any threats to stability that may emerge."
Indeed, he deftly stepped through a couple hypothetical scenarios -- an energy price shock and inflation exceeding its targeted parameters -- using history and anecdotes as convincing props for his approach to ensuring that inflation expectations would remain in check without any dogmatic or abrupt changes to the policy settings.
Bernanke also struck the right chord of humility in drawing on the strengths of the committed Fed staff, which spoke to his preference for consensus building and bolstering the strengths of the institution from within, given his insider's perspective on the central bank.
He also appropriately thanked Greenspan for his "collegiality and support" when he served as a board member, concluding poignantly that "one may aspire to succeed Chairman Greenspan, but it will not be possible to replace him."
Wallace is Global Market Strategist for for Action Economics