Bernanke: Not Just a Greenspan Sequel
By Rich Miller
Ben Bernanke sounded a lot like the man he has been nominated to replace as Federal Reserve Chairman in discussing the near-term outlook for the U.S. economy on Nov. 15. The economy is in the midst of a "strong recovery," the 51-year-old economist told lawmakers at his confirmation hearing. The job market is improving, and productivity growth is robust. Housing prices are more likely to stabilize than tank. Sky-high energy prices are a concern, but there's scant sign they're leading to a more generalized rise in inflation and inflation expectations. And what's more, Bernanke pledged, his Fed would be determined that they don't.
Put it all together, and there's not much reason to expect Bernanke to deviate from departing Fed chief Alan Greenspan's strategy of gradual, quarter-percentage-point rate hikes when, as looks likely, he takes over the top job on Feb. 1. Of course, a lot will depend on how the economy looks at the time. But based on what Bernanke told the Senate Banking Committee on Tuesday, he for one doesn't expect things to change all that much. "The baseline looks reasonably strong," he testified.
It's in the longer term where a Bernanke-led Fed might look a lot different from the one he's inheriting from Greenspan. For one thing, Bernanke made clear to lawmakers that he isn't going to opine on federal budget policy. "I'm going to begin now, I think, a practice of not making recommendations on specific tax or spending proposals," he said. That's in sharp contrast to Greenspan, whose support for President Bush's hefty tax cuts in 2001 played an important role in getting them enacted.
More importantly, Bernanke told the banking panel that he intends to continue his push for the Fed to adopt numerical targets for inflation -- a move long resisted by Greenspan out of concern that it might tie the central bank's hands. Bernanke sought to downplay his differences with Greenspan by describing the adoption of a target as a small step and by affirming his support of the Fed's dual mandate to achieve both price stability and maximum employment. On top of that, he assured lawmakers that he would take "no precipitate steps" in introducing an inflation target (see BW Online, 11/16/05, "A Plain-Speaking Fed Chief?").
Not everyone was convinced. Senator Paul Sarbanes of Maryland, the ranking Democrat on the committee, warned Bernanke that, despite his best intentions, such a step would lead the Fed into putting more emphasis on fighting inflation than promoting economic growth. "If you had a numerical figure for inflation but not for unemployment, there would be a shift in focus of policymaking and debate," Sarbanes said. "The constant focus [would] be: Have you hit the numbers target on your inflation goal?"
That could be particularly dangerous if the economy was suddenly hit by a crisis, like a stock-market crash. Bernanke sought to assure the lawmakers that he recognized the Fed's role as a crisis fighter. "The Federal Reserve has important responsibilities for maintaining financial stability," he said. "[It] must deal with financial crises of all different kinds."
He also downplayed concerns that America's increased foreign indebtedness would undercut the Fed's ability to handle a financial emergency like a sudden downdraft of the dollar. "I don't believe that the ability of the Federal Reserve to respond…has been substantially compromised," he said. "It just makes the problem more complicated. It requires more expertise."
At the start of his confirmation hearing, Bernanke pledged to follow in Greenspan's footsteps when it comes to carrying out monetary policy. "I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority," he told the lawmakers. That may be true at the start of his tenure. But it may not stay that way for long.
Miller is a senior writer in BusinessWeek's Washington bureau