Everybody Loves Bernanke: Considering the Federal Reserve Chair Nominee

The Federal Reserve may seem abstract, but its chairman affects our daily lives. He (there has never been a she - yet) determines interest rates, which influence everything from your mortgage to your credit cards. The Federal Reserve chair can help to avoid a recession or control inflation; he (and someday she!) is considered by The Wall Street Journal to be the world’s most influential economic policy maker.

On October 24, 2005, President Bush announced his nomination for the replacement for Federal Reserve Chair Allan Greenspan, who is retiring. Unlike Bush’s other recent nominees, Ben S. Bernanke was greeted with resounding fanfare. Academic economists, Wall Street, and even bloggers are happy about the nomination, and Bernanke is expected to pass through the Senate confirmation process with flying colors.

Who is this Bernanke guy?

Bernanke is not yet a household name because he has spent the majority of his career in academia, chairing the economics department at Princeton University. He became a member of the Federal Reserve board in 2002 and was considered one of its most outspoken members through 2005. In June 2005, he became chairman of the president’s Council of Economic Advisers.

Upon the nomination, the stock market soared and bond prices dropped, since many assume that Bernanke will be easier on rising prices or, inflation, than Greenspan was.

Inflation targets

One of Bernanke’s trademark theories is that publicly forecasting inflation rates will encourage investment and promote open and responsible policy-making. Arguing that "inflation targeting" is more consistent with the democratic political system, Bernanke believes that the Federal Reserve should make a public commitment to achieve a certain inflation percentage (probably around 2 percent) in a certain number of years (short term - probably two or three years).

Bernanke contends that the central bank must keep markets and the public well-informed so that they can evaluate the Federal Reserve’s performance. He explains that inflation targeting does not require the central bank to maintain the proposed inflation rate at all times, especially in the event of a financial crisis.

But because the Federal Reserve will have established an openness with the public, Bernanke argues, the central bank will have more flexibility to make changes in case of a crisis by simply informing people about why it missed the inflation target and how it will attain it in the future. Bernanke says, "[inflation targets] help maintain confidence in the commitment to price stability even when adverse developments lead to missed targets."

Greenspan is not a fan of inflation targets because he doesn’t like to commit to a particular number, Anil Kashyap, economics and finance professor at the University of Chicago Graduate School of Business, told The New York Times.

But Greenspan and Bernanke are more similar than different. In fact, some economists read Bernanke’s papers in order to get insight into Greenspan’s mind. During a press conference in the Oval Office, Bernanke said that his first priority as Federal Reserve chair would be "to establish continuity with policies and policy strategies established during the Greenspan years."

While analysts expect Bernanke to follow Greenspan’s lead, they also think he will be less political than his predecessor. Even while serving under President Bush, Bernanke has tended to be politically neutral when considering economic policies. However, Bernanke’s ideas support the Bush agenda.

Bernanke’s ideas

Bernanke is famous for explaining the account deficit that is caused when U.S. imports exceed U.S. exports, which has been the case for several years. He believes that global trends are more responsible for this deficit than are domestic policies such as tax cuts, spending increases, and trade policies.

This notion sharply deviates from the more conventional idea that U.S. account deficits are caused by overspending, fewer tax dollars, low productivity, and job loss.

Bernanke also challenges those who worry that foreign investors will some day stop buying U.S. savings bonds. Because the dollar is the leading international reserve currency, and because developing countries often peg the value of their currency to the dollar, Bernanke argues that many countries (including developing countries) will continue to invest in U.S. Treasury securities.

Bernanke will need that innovative thinking for the challenges ahead. He faces the weakening of the dollar, rising oil prices, and slowing income growth. Will Bernanke, like Greenspan before him, be considered an economic superhero one day?

How do rising interest rates affect you and your family? What about rising prices? Has your income changed much in recent years? Did you know that all of these things are related to decisions made by the Federal Reserve chair?

What do you think?

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Article Posted on: 10/28/2005