Fed chief scores high in first year
Nobody ever said Alan Greenspan would be an easy act to follow.
But Ben S. Bernanke, marking his first anniversary as chairman of the Federal Reserve, is winning Greenspan-like plaudits for deftly steering the U.S. economy toward the promised land of steady growth and moderating inflation.
With President Bush focused on Iraq and Treasury Secretary Henry M. Paulson shepherding most of Bush’s domestic agenda, the nation’s central banker is now more than ever the chief steward of the U.S. economy.
Bernanke took over from the highly regarded Greenspan a year ago Thursday at a particularly sensitive time, with the expansion that followed the 2001 recession getting long in the tooth and the Fed still raising interest rates to fight inflation.
With a couple of exceptions -- the booming 1960s and the Greenspan era during the 1990s -- such long periods of economic growth and Fed rate hikes usually resulted in recession.
But after 14 rate increases under Greenspan starting in 2004, Bernanke’s Fed lifted rates three more times before stopping last summer. The chances of error were high. If Bernanke had stopped tightening too soon, inflation could have reignited. If he kept going too long and overshot, the high rates could have choked economic growth.
“It was not an easy decision,” said Robert DiClemente, Citigroup Inc.’s chief U.S. economist.
By most measures, Bernanke got it just right. Now it’s hard to find an economist who predicts a recession any time soon. In fact, the economy appears to be getting a second wind, with growth actually picking up again while inflation has declined -- factors that probably are weighing on Bernanke and his Fed colleagues as they conclude a two-day policy meeting today.
“The changes in interest rates were just what the economy needed,” said Nariman Behravesh, chief economist for Global Insight Inc.
Favorable comments are coming even from those who are usually quick to criticize the Fed for sacrificing economic growth in the interest of controlling inflation.
“I think he’s concerned about the extent to which today’s prosperity hasn’t been widely shared,” said Jared Bernstein, an economist with the liberal Economic Policy Institute. “I see a refreshing sympathy for working people.”
Bernanke’s reviews are just as solid among business advocates. Daniel J. Meckstroth, chief economist for the Manufacturers Alliance, said Bernanke had helped steer the economy to a point similar to where it was in 1995.
The recovery from the 1990-91 recession was complete, he said, and the economy was sputtering. But rather than crashing like an improperly de-iced airliner, the economy touched down briefly, refueled and took off again.
Circumstances have contributed to Bernanke’s fortune. On the negative side, he inherited an overheated housing market that was due for a slump. He had to ensure that rising interest rates would not throw it into a full-fledged collapse.
At the same time, it was Bernanke’s good luck that declining oil prices took the edge off inflation. And Bernanke faced no crisis early in his tenure comparable to the stock market crash that greeted Greenspan in 1987.
More than that, the nature of the economy has changed, to the Fed’s benefit, in the last two decades. Globalization -- the easy flow of money and, more recently, jobs across national borders -- weighs against higher prices and wages, making it easier for the Fed to look good in its fight against inflation.
Some increasingly common business practices -- such as “just-in-time” inventories and the growing use of temporary employees -- have moderated the economic cycle by keeping businesses from overexpanding and then downsizing dramatically when sales slow.
But the Fed has to do its part. When Bernanke took over from Greenspan, he had the right credentials.
He knew the Fed: He had been a member of its board from 2002 to 2005. He knew politics: He was chairman of President Bush’s Council of Economic Advisors when Bush chose him as Fed chairman. And he knew economics: He had been the highly regarded chairman of Princeton’s economics department.
Bernanke made no claim that he could steer the Fed more adroitly than Greenspan, who had achieved a level of public adulation that is rare in Washington.
But he did offer improvement in informing the public of the Fed’s often arcane policy decisions in clear and understandable terms.
How to communicate its decisions is particularly important to the Fed, which deliberates behind closed doors. The public -- particularly the investing public -- abhors uncertainty. Stock and bond markets rebel when they aren’t confident that they know what their policymakers are up to.
Bernanke stumbled getting out of the starting box.
“He hasn’t done a good job of communicating,” said David Kelly, chief economic advisor at Putnam Investments.
In his third month on the job, Bernanke testified to Congress’ Joint Economic Committee that the Fed might pause hiking rates for a month or two, even if it determined that inflation still posed a greater threat than an economic slowdown. To the markets, that seemed clear enough, and stock prices rose.
But in a casual conversation the following weekend, Bernanke told CNBC reporter Maria Bartiromo that the markets had misconstrued his earlier comment. “It’s worrisome that people would look at me as dovish and not necessarily an aggressive inflation fighter,” Bartiromo quoted Bernanke as saying.
That was more candor than the markets could swallow. In the hour after Bartiromo’s report, the Dow Jones industrial average lost 75 points.
Bernanke has been careful not to repeat that gaffe. “In the future,” he promised the Senate Banking Committee, “my communications with the public and the markets will be entirely through regular and formal channels.”
Bernanke averted some other potential trouble by something else he did not do.
As a private economist, he had spoken favorably about setting publicly announced targets for inflation. Warned by colleagues that such targets could limit the Fed’s flexibility, Bernanke opted instead for informal target ranges. The Fed did not make its “comfort zones” public, but its statements allowed the public to infer them.
The key comfort zone for inflation, for example, is a 1% to 2% annual rate of increase in the so-called core personal consumption expenditures index -- a measure (excluding volatile energy and food costs) that accounts for consumers’ changing their buying habits in response to price fluctuations.
This index has exceeded the comfort zone throughout Bernanke’s first year, but not by much, and Bernanke has suffered no ill effects.
Inflation targets or no, Fed chairmen are graded on how well inflation behaves during their tenure. And the only tangible tool at the Fed’s disposal is interest rates.
The Fed began in June 2004 to raise its benchmark short-term rate by 0.25 of a percentage point at each of the eight meetings it holds annually. By the time Bernanke took the reins a year ago, the central bank had raised short-term rates from 1% to 4.5%.
Bernanke had to decide whether the previous several rate increases had made their full anti-inflationary effects felt. How could he know how much harder to tighten the screws if he didn’t know how tight they were in the first place?
In the end, Bernanke and the Fed approved three more rate hikes, to 5.25%, as of June.
Will the Fed’s next move on rates be up or down? Economists aren’t sure -- it probably depends on whether future data suggest a greater risk of resurgent inflation or economic slump.
Although the Fed’s policymaking committee is expected to stand pat on rates again today, the question is whether it will signal a possible bias toward raising rates again.
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