Bernanke Would Lead With Words As Well as Rates, Fed Observers Say
Saturday, November 12, 2005
Wall Street was growing worried in November 2002 that the Federal Reserve might not be able to keep the economy from tumbling into another downturn.
Economic growth was sluggish, just a year after a recession and terrorist attacks. And inflation was falling unusually low, even though the Fed's benchmark short-term interest rate was at its lowest level in more than four decades. The Fed couldn't lower the rate much more, and soon might have no power to spur a more vibrant expansion, many analysts speculated.
Wrong, said Ben S. Bernanke, a former Princeton economics professor who had joined the Fed board just four months earlier.
Bernanke, in a speech, reassured the markets that the Fed still had several weapons to stimulate the economy and had "most definitely not run out of ammunition." Bernanke also suggested that the Fed had beaten inflation, its arch-enemy since the 1970s, and had shifted its focus to a new danger -- deflation, the crippling decline in overall prices that plagued the United States during the 1930s and Japan in the 1990s.
To listeners in financial markets, Bernanke's words marked a turning point for the Fed and heralded the arrival at the central bank of a new voice and strategist to help guide the economy through a dicey time.
"It was a powerful speech that was nothing less than a declaration of victory against inflation, a regime shift" for the Fed, recalled Paul McCulley, managing director of Pimco, or Pacific Investment Management Co. "We recognized that was a profound moment in monetary policy."
Now, just three years later, Bernanke appears headed toward easy Senate confirmation as President Bush's nominee to succeed Alan Greenspan as Fed chairman. However, some skeptics question whether the one-time academic is prepared to work with financial markets and translate theory into effective policy. Bernanke is not giving public interviews during the confirmation process, but several money managers and analysts say his experience at the Fed should allay such concerns.
Bernanke's performance as a Fed board member from August 2002 through earlier this year "proved he was not just a man of books, he was a man of action," McCulley said.
Bernanke joined the Fed after an academic career that established him as a leading expert on monetary policy -- the central bank's efforts to keep inflation and unemployment low by controlling the growth of the money supply, primarily through adjusting interest rates.
The Fed's economists quickly appreciated his expertise and eagerness to work with them, according to current and former Fed colleagues.
"The staff love him. They're turning cartwheels" at the thought of Bernanke becoming chairman, said Edward M. Gramlich, who left the Fed board in August after serving for eight years. Gramlich and others who worked with Bernanke at the Fed describe him then as thoughtful, substantive, direct and quietly persuasive.
"Ben is an easy guy to like," said Robert D. McTeer Jr., the former president of the Federal Reserve Bank of Dallas. Bernanke tended to promote his ideas through speeches or articles, and "didn't engage in any hard-sell in the [Fed policymaking] meetings," McTeer recalled. "It was all very gentlemanly."