Ben Bernanke Is Locking in His Legacy

Photograph by Tomohiro Ohsumi/Bloomberg

Michael Feroli, chief U.S. economist at JPMorgan Chase, has a fascinating analysis out Thursday on how Federal Reserve Chairman Ben Bernanke is moving to lock in new procedures for setting interest rates that will last long after his term ends in January 2014. The upshot is that Bernanke, who vowed to depersonalize the Fed, could end up imprinting his style on the central bank much more strongly than did his predecessor, Alan Greenspan.

The procedural changes “would add a significant inertial element” that would keep policymaking from changing quickly even after Bernanke has left the Fed, Feroli says.

According to the minutes of its Sept. 12-13 meeting, the rate-setting Federal Open Market Committee discussed the pros and cons of “specifying numerical thresholds for labor market and inflation indicators” that would justify keeping the federal funds rates at nearly zero. The committee concluded that announcing thresholds “could be useful” but required “further work.” The FOMC is also considering publishing a forecast for interest rates that represents a consensus of the FOMC.

“A numerical threshold policy, in particular, would bind any collegially minded incoming chairman from deviating too far from current policy,” Feroli writes in a note to clients. (Sorry, no link.)

One example of numerical targeting is a proposal pushed by the FOMC’s most dovish member, Chicago Fed President Charles Evans, under which the Fed would keep rates close to zero until the unemployment rate is under 7 percent or inflation goes over 3 percent. The concept of targets could take hold even if Evans’s preferred parameters don’t.

Creating a rules-based system for setting rates, instead of the “cult of personality” practiced by Greenspan, “could mean that Bernanke is influencing Fed actions long after he has returned to Princeton,” writes Feroli.

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