October 26, 2005
Wednesday

Economists and money managers lauded Ben Bernanke, a leading authority on monetary policy, as the perfect successor for the Federal Reserve's longest-serving chairman and predicted his leadership would differ from Alan Greenspan's in ways only academics were likely to notice, if at all.

Bernanke, who since June has served as the White House top economic adviser, is expected to face little challenge in his Senate confirmation.

"I think Ben Bernanke will be well-received on Capitol Hill," said Stuart Hoffman, chief economist at PNC Financial Services Group."I think people will find him a very nonpartisan policymaker."

Hoffman noted that Bernanke, nominated Monday by President Bush, also ranked as the perceived frontrunner to take the central bank's helm in a September survey of the National Association of Business Economists.

In a brief acceptance speech at the White House, Bernanke, who has chaired the president's Council of Economic Advisers since June and served for three years before that as one of the Federal Reserve's governors, pledged "continuity" with Greenspan, whose 18-year regime is widely considered the most successful in the central bank's history.

That alone signaled to financial circles that "he's not going to come charging in there with this list of policy changes that are going to be introduced dramatically," said Richard DeKaser, chief economist of Cleveland-based National City Corp.

Bernanke, 51, a graduate of Harvard who received his doctorate at the Massachusetts Institute of Technology and served as chairman of Princeton University's economics department, also said that the best practices of monetary policy evolved under Greenspan and would "evolve further" if he is appointed.

But those familiar with him and his academic work said the biggest change they thought Bernanke would advocate was adoption of a stated inflation target. In 2000, Bernanke wrote a commentary piece in the Wall Street Journal suggesting that explicit inflation targets would ensure the Greenspan legacy.

However, that would amount to more of a difference in style than substance from his predecessor, economists said.

"Greenspan certainly has had a target for inflation," said Allan Meltzer, a Carnegie Mellon University economist and author of "A History of the Federal Reserve, 1913-1951."

But Greenspan chose not to spell out the precise acceptable range for inflation that the Fed would pursue by raising or lowering interest rates to either tighten or loosen credit and therefore the money flowing through the economy.

Greenspan suggested only that inflation should be low enough that businesses and individuals would not need to take it into account when making financial decisions, Meltzer said.

Central banks in many other nations set precise inflation targets, but whether it matters that much is a subject "of great debate" among economists, said Marvin Goodfriend, a Carnegie Mellon professor and former economist for the 5th district of the Federal Reserve.

Goodfriend said the key value in spelling out an inflation target was to keep the dangers of high inflation before policy makers and the public.

Hoffman said a stated inflation target was likely to be in a range of 1 percent to 2 percent.

Because inflation has been tame for so long, a generation of people who have not experienced the economic damage it wreaked, including widespread layoffs in the 1980s, could forget how ruinous high inflation can be, he said.

Goodfriend said the issue is important to Bernanke, whose academic work has focused on how Fed policy contributed to the Depression of the 1930s.

Goodfriend, a longtime acquaintance of the nominee, characterized Bernanke as "a very down-to-earth guy who enjoys talking to people."

"He enjoys listening because he wants to understand how the world works," Goodfriend said.

Most economists said use of a specific inflation target would be another step toward greater transparency about the Fed's objectives and the way it intends to pursue them.

While many people regarded Greenspan's speeches to Congress as opaque, economists said that particularly in recent years, the Fed chief has tried to make the central bank's direction clearer to the financial markets. In his years at the Fed, Bernanke earned a reputation as direct, even outspoken.

Economists also noted that as much as the Greenspan-led Fed has been vigilant about inflation, it also acted to stem the possibility of deflation by lowering interest rates in the face of economic shocks brought on by the stock market collapse and the 9/11 terrorist attacks.

At the time, Bernanke was vocal about the need to do so.

"He was at the forefront of those who were in favor of interest rate cuts because of fear of deflation in 2002," DeKaser said.

Inflation and deflation are flip sides of the same coin. Inflation is characterized increases in wages and prices while deflation represents decline. The central bank's real objective is wage and price stability.

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