quote:

Big Challenges Await Bernanke
In Managing Fed, the Economy

If Confirmed, Nominee Faces Decisions
On Future of Rates,
How to Wield His New Clout
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
October 26, 2005; Page A2

WASHINGTON -- Ben Bernanke, nominated this week to succeed Alan Greenspan as Federal Reserve chairman, will face important challenges from day one managing both the economy and the Fed.

If confirmed by the Senate, he will have to decide whether to continue the campaign of interest-rate increases his predecessor began. And, lacking Mr. Greenspan's stature and experience at building consensus, he will have to persuade strong-minded Fed colleagues to go along -- despite likely differences on what the Fed should do and say.


Since June 2004, the Fed has raised the target for the federal-funds rate, charged on overnight loans between banks, at each of its 11 policy meetings by a quarter of a percentage point, bringing it to 3.75% from 1%. If the Fed continues at that pace, as markets expect, the rate will be 4.5% in February when Mr. Bernanke would take office if he is confirmed. That will bring the rate close to most estimates of "neutral" -- a rate that neither stimulates nor restrains economic growth.

Mr. Bernanke then will have to decide whether to stop and risk inflation, or continue and risk weakening the economy. The circumstances may make the choice obvious, but the decision will be tougher if the data are muddy.

In that case, Mr. Bernanke may feel pressure to raise rates to assert his political independence and his anti-inflation credentials. Both Mr. Greenspan and his predecessor, Paul Volcker, continued the tightening their predecessors began. Mr. Bernanke will face "residual suspicion that he will accommodate inflation pressures," says Tom Gallagher, analyst at ISI Group, an investment-research firm. He says that raises the odds the Fed will increase rates at its March 28 meeting, which would be Mr. Bernanke's first as Fed chairman.

Part of Mr. Bernanke's challenge will be influencing other members of the Federal Open Market Committee, the Fed panel that sets rates. The FOMC is composed of the 12 regional Fed bank presidents, five of whom vote at any one time, plus seven Fed governors in Washington. Two seats are currently vacant.

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• Sen. Charles Grassley (R., Iowa) comments on President Bush's nomination of Ben Bernanke to lead the Federal Reserve. 10/25/05

In the past few years, dissents have been rare because of broad agreement on the direction of policy and because of Mr. Greenspan's management style. He makes sure all members feel listened to, insiders say, and, occasionally, compromises -- altering the language of the post-meeting statement, for instance -- to achieve agreement. He also prods colleagues toward his view in subtle ways, such as presenting his recommendation before other members state theirs. "Like Greenspan, [Mr. Bernanke] will lead the committee by the force of his argument more than the force of his personality," says Edward Gramlich, who stepped down as a Fed governor in August.

Mr. Greenspan inherited a sometimes fractious FOMC, including governors who challenged Mr. Volcker's judgment. Mr. Bernanke would inherit a more collegial committee, but one that includes two members -- Donald Kohn and Roger Ferguson, the vice chairman -- whose views on monetary policy command respect. Should they disagree with Mr. Bernanke, they could be seen as rivals for power.

But people who have worked with the three consider that unlikely. When Mr. Bernanke was a Fed governor, from 2002 to last June, the three were on the same side on the Fed's biggest issues. To be sure, Mr. Bernanke supports an explicit target for inflation; Mr. Kohn and Mr. Ferguson don't. But Al Broaddus, former president of the Federal Reserve Bank of Richmond, predicts Mr. Bernanke will move slowly on any such proposal and shape the details to get "everyone in the tent."

Mr. Bernanke could face a market crisis, like the stock-market crash that greeted Mr. Greenspan two months after he took office in 1987. "Over the next 18 months, it's a reasonable bet, especially with interest rates going up, there will be some accidents in financial markets," said Ted Truman, a former top Fed staffer now at the Institute for International Economics, a Washington think tank.

A popular candidate is a run on the dollar. Hong Kong Chief Executive Donald Tsang, meeting with reporters and editors of The Wall Street Journal yesterday, warned the world wouldn't tolerate huge U.S. trade deficits indefinitely. He suggested a run on the dollar could start with hedge funds, followed by central banks, though he noted that he has been warning of such an event for years. "What's happened to gravity?" he asked.

While Mr. Bernanke has no experience handling such a crisis, Mr. Truman said he won't be "sitting there all alone on an ivory tower figuring out what to do -- he has a lot of experienced people." Indeed, it was Mr. Ferguson and Mr. Kohn who handled the Fed's initial response to the Sept. 11 terrorist attacks because Mr. Greenspan was in Europe.