The next Fed chief

October 25, 2005

Much is certain about Ben S. Bernanke, nominated yesterday to replace Alan Greenspan as chairman of the Federal Reserve. He is a very well regarded expert in monetary policy. Overall, he offers more of a continuity than a break with Mr. Greenspan, particularly as to a strong focus on fighting inflation. In contrast to the current chief, however, he favors greater transparency by the Fed - so much that he has advocated setting for the first time an explicit inflation-rate target range for the Fed. Mr. Bernanke, moreover, was just appointed in June as chairman of the Bush administration's Council of Economic Advisors, widely viewed as an outright audition for the top job at the Fed.

The choice of Mr. Bernanke thus was not surprising. And it might, indeed, be the right one. But it is troubling that he appears to have had to first leave the Fed's Board of Governors to spend a few months inside the Bush White House so that his political leanings and loyalties could be more closely vetted. As with Mr. Bush's recent Supreme Court appointments, senators should use Mr. Bernanke's confirmation hearings to try to ascertain his degree of independence from the White House, a necessary and critical attribute for any Fed chief.

If Mr. Bernanke has been brought tightly within the Bush fold, he was known at times as an independent, if not maverick, thinker during his three years on the Fed's board. He now need only look at the example of Mr. Greenspan, widely acknowledged to be the Fed's most successful chief, whose best turns were born of independent insight and whose worst included the flagrantly political error of openly endorsing President Bush's tax cuts - which have contributed mightily to a deteriorated U.S. fiscal picture.

Any successor to Mr. Greenspan also may be wise to learn as well from his vaunted flexibility. If the "maestro" has artfully influenced the direction of the U.S. economy with nuances beyond the Fed's narrow task of setting overnight bank rates, Mr. Bernanke appears prone to become less a conductor and more an engineer - trying to keep inflation in check with open targeting of an ideal inflation-rate range. Some would argue that the Fed does this now but in an unstated manner. If Mr. Bernanke states explicit targets - a process used by some other central banks around the world and one that provides the kind of certainty that Wall Street loves - the Fed could find itself dangerously hamstrung at critical junctures and wishing for more artfulness.

There is no question that Mr. Bernanke has the right credentials and experience to succeed Mr. Greenspan. It's unfortunate, but there are some questions about his independence that must be addressed. And there is the hope that if confirmed, Mr. Bernanke will show that he not only is a smart economist but also retained a strong streak of independence.

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