Federal Reserve Nominee’s Difference Is One of Style

In three years of serving under Alan Greenspan on the Federal Reserve Board, Ben S. Bernanke sided with the chairman on every decision to move interest rates up or down or to leave them alone.

But Bernanke, nominated Monday by President Bush to become the next Fed chairman, is no clone of the 79-year-old Greenspan, analysts say. Their distinctions are more in style than substance, but that could make a difference in interest rate policy and crisis management.

Perhaps the biggest difference involves whether the Fed should set an explicit, publicly announced target for its core mission: controlling inflation.

Greenspan has preferred not to set such targets, thinking that it might reduce the Fed’s flexibility to adjust to changing conditions.

“Greenspan is a seat-of-the-pants central banker” who makes decisions by instinct as well as by analysis, said Alan Wilde, a director of fixed income and currency for Baring Asset Management in London.

The 51-year-old Bernanke, by contrast, has spoken and written favorably of “inflation targeting”: the practice of setting an inflation goal and adjusting interest rates as necessary to achieve it.

It sounds rigid and formulaic. But Nariman Behravesh, chief economist with consulting firm Global Insight, predicted that Bernanke would generally reach the same conclusions as Greenspan even if his methods might be different.

In an article in Foreign Policy in 2003, when inflation was running close to zero, then-Fed board member Bernanke made the case for inflation targeting, with a goal of 1% to 2%.

Anything higher, he said, would produce “economic volatility, slow growth and high unemployment.” Anything lower would risk the deflation -- falling prices -- that “was a principal cause of the Great Depression.”

At the time of the article, the Fed had set its benchmark short-term interest rate at a historically low 1%. The economy responded with more job creation and slowly rising prices, and in June 2004 the Fed began its current campaign of raising rates by 0.25 percentage point at a time, to 3.75% today.

Gus Faucher, a senior economist at Economy.com, said this policy was the result of what he called “implicit targeting”: having a rough goal in mind but not acknowledging it. Bernanke, if he wins confirmation by the Senate as expected, might be inclined to make the target public but still flexible, Faucher said.

“He’s not so dogmatic an inflation targeter that he ignores everything else that’s going on in the economy,” Faucher said. “Inflation targeting is a continuum, and it’s a question of how far down the spectrum he’ll go.”

“I don’t see him setting a bunch of inflexible rules,” said Ethan Harris, an economist at Lehman Bros. in New York. To Bernanke, Harris said, the appeal of targeting is that the stock and bond markets are less nervous when they know what policies the Fed is pursuing.

Both men believe in transparency: publicly disclosing the Fed’s intentions and proceedings. But Bernanke, a former university professor known for his plain talk, is expected to be far more clear in his pronouncements than Greenspan, whose speeches are often shrouded in obscure language.

Under Greenspan, the once-secretive Fed has already become much more transparent. Greenspan testifies to Congress about monetary policy and the state of the economy even more than the semiannual appearances required by law. More important, the Fed explains its rate decisions as it makes them and, three weeks after the fact, publishes minutes of its meetings.

David Kelly, managing director of Putnam Investments in Boston, wondered whether Bernanke would be too talkative for his own good.

Bank of America economist Mickey D. Levy, a member of the Fed-watching Shadow Open Market Committee, predicted that Bernanke’s penchant for public discourse would stop at the boundaries of monetary policy.

“Greenspan stuck his neck out” on politically charged issues such as Bush’s tax cuts, Levy noted.

Maintaining the markets’ confidence will be particularly important if Bernanke, like Greenspan, is blindsided by a financial crisis early in his tenure.

Greenspan was less than three months into his 18-year chairmanship when the stock market crashed in October 1987. With predictions of recession all around him, Greenspan helped keep the economy on an even keel by injecting massive sums of money into the banking system -- thus launching his reputation as a financial superman. The same technique minimized damage from the collapse of technology stocks in 2000 and 2001.

The likeliest crisis to confront Bernanke early in his tenure is a sudden reversal of soaring housing prices, especially on the East and West Coasts, economist Behravesh said.

“How do you nudge interest rates high enough to contain inflation without bringing on a crash in the housing market?” Behravesh asked. There may be no answer, he said, but Bernanke’s first priority is clear: “He will have room to maneuver if he can keep the inflation genie in the bottle.”

University of Rochester economist Charles I. Plosser, another member of the Shadow Open Market Committee, said Greenspan had set the bar high for his successor.

“Greenspan in some ways loved attention ... and even cultivated it,” Plosser said. “But that’s a dangerous model because what happens when you get a person who’s not up to the job?”

On the other hand, Baring’s Wilde said, Greenspan has smoothed the way for the Fed policymaking committee’s first meeting under Bernanke, on March 28. The committee will probably raise rates by the customary quarter-point at its meetings Nov. 1 and Dec. 13, Wilde said, and it may pause at its Jan. 30 and 31 meeting, on the eve of Bernanke’s taking office Feb. 1.

Then Bernanke will have nearly two months to get comfortable in the job and assess new economic data, Wilde said, before deciding whether to raise rates again.

“Either way,” he said, “Bernanke can claim he’s just continuing the policy of his predecessor.”

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Times staff writer Thomas S. Mulligan contributed to this report.

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(BEGIN TEXT OF INFOBOX)

Job description: Fed chairman

Duties of the chairman of the Federal Reserve:

* Serve as chair of the Federal Open Markets Committee, which sets the benchmark federal funds rate

* Regulate and supervise banks

* Oversee financial services to banks, including currency distribution, check processing and electronic payment systems

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Greenspan traditions

As Federal Reserve chairman, Ben Bernanke would be watched to see whether he continued such practices as:

* Promoting transparency: Under Greenspan, the Fed issued a statement describing each of its interest rate moves. And recently it began releasing minutes of policy meetings three weeks

later. Most analysts agree that such disclosure is good, but some say it encourages speculation by reducing the chances that the

Fed could surprise the markets.

* The “Greenspan put”: This refers to investors’ belief that the Fed will bail out financial markets in cases such as the 1987 stock market crash. It makes reference to put options purchased by investors as insurance against drops in the price of a security. Critics say it encourages excessive market speculation.

* Not targeting asset bubbles: Under Greenspan, the Fed’s doctrine has been to avoid acting on asset bubbles, such as what some analysts think is now happening with the housing market. Instead, the Fed seeks to alleviate conditions after a bubble has burst.

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