Fed's Loss Is Bernanke's Gain

With Vice-Chairman Roger W. Ferguson Jr., a Democrat, out of the way, the new Federal Reserve chairman can now dominate the inflation debate

Ben Bernanke barely had time to put out the family photos on his new desk at the Federal Reserve chairman's office before his No. 2 announced his exit. Fed Vice-Chairman Roger W. Ferguson Jr., a Democrat who was the sole remaining Clinton appointee to the Federal Reserve, tendered his resignation on Feb. 22, giving President George W. Bush yet another seat to fill at the seven-member board. "This opens up an opportunity for Bush to put a further stamp on the Fed," says Gus Faucher, director of macroeconomics at Moody's Economy.com.

Bush isn't the only beneficiary of Ferguson's departure. Bernanke now also carries a stronger hand as he tries to carve his own path in the wake of his legendary predecessor, Alan Greenspan. Without Ferguson, Bernanke has a clearer shot at realizing one of his top objectives: imposing an explicit target rate for inflation, of perhaps 1% to 2%, at which the Fed's monetary policy should aim.


  Ferguson, who will leave on Apr. 28, and Donald L. Kohn are the only two Fed governors who have expressed outright skepticism about this idea. Both are respected holdovers from the Greenspan era, who -- like the former monetary maestro himself -- prefer greater flexibility in policymaking.

With Ferguson gone and Kohn as the lone high-profile holdout, Bernanke has a better chance of dominating the debate on inflation targeting. The Senate recently approved two new Bush appointees to the Fed -- academic economist Randall S. Kroszner and attorney Kevin M. Warsh -- whose views on inflation targeting are unclear. Both had served in the Administration and are regarded as Bush loyalists.

Bush could elevate one of his earlier Fed appointees to the vice-chairman's seat, or use the extra title to sweeten the deal for a new nominee. While it's too early to say who the White House might appoint to fill Ferguson's seat, Fed watchers say the Administration needs to choose someone with crisis-management credibility. Ferguson had gotten high marks for managing both the Y2K transition and the September 11 crisis, helming the Fed at a critical moment when Greenspan was out of the country.


  Peter R. Fisher, who served as Treasury undersecretary during W's first term, or Christine M. Cumming, a career staffer at the Federal Reserve Bank of New York, might fit the bill, suggests Adam S. Posen, senior fellow at the Institute for International Economics. Others wonder whether the White House may consider former Administration appointees and noted economists, such as Todd Buchholz or Richard Clarida.

Either way, Bernanke will likely have some say in the selection of his new right-hand governor and the shape of his new Federal Reserve.

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