Ben S. Bernanke, President Bush's nominee to succeed Alan Greenspan as Federal Reserve chairman, pledged yesterday to protect the central bank's political independence while continuing his predecessor's policies.
Bernanke, a Republican, served on the Fed board for nearly three years until moving to the White House in June. In his current job, as chairman of the president's Council of Economic Advisers, he has urged Congress to extend Bush's tax cuts, approve the president's proposed spending reductions and adopt other elements of the administration's economic agenda.
But if confirmed as Fed chairman, he said, "I will be strictly independent of all political influences and will be guided solely by the Federal Reserve's mandate from Congress and by the public interest."
The Fed adjusts short-term interest rates with the goal of keeping inflation low while encouraging job creation and economic growth; its decisions affect the daily lives of consumers, businesses and investors. Economists agree the central bank must sometimes take unpopular actions, such as raising interest rates to dampen demand and inflation pressures. However, politicians at times prefer the Fed to spur the economy and help create jobs ahead of an election, even though that might fan price increases.
Bernanke would take over at a time of multiple economic challenges, including huge U.S. trade and budget deficits, high energy prices, and a cooling housing market.
He did not discuss the Fed's current strategy of steadily raising short-term interest rates to keep the lid on both price increases and consumers' expectations of future inflation. But he did say he thinks inflation, outside of food and energy prices, is under control.
Bernanke, a former economics professor, said the economy is in a "strong recovery," which he expects to continue next year, despite high energy prices.
He said that large federal budget deficits are a problem but that he would not recommend specific tax or spending measures to reduce them, preferring to leave that job to Congress. Greenspan, in contrast, has been willing to speak out on fiscal issues. He strongly supported tax cuts in 2001 to reduce projected budget surpluses.
Bernanke expressed concern that the budget deficit is projected to soar in coming decades, as baby boomers collect retirement and health benefits, posing "a looming issue that needs to be addressed sooner rather than later."
Bernanke repeated his promise that as Fed chief he would pursue "continuity with the policies and policy strategies of the Greenspan Fed." They include placing a priority on maintaining low inflation, using flexibility and judgment in deciding how to adjust short-term interest rates, and continuing to make the Fed more open to the public about its thinking and plans, he said.
But Bernanke also said Fed policy will "evolve over time," and he broke with Greenspan on whether the central bank should state an explicit inflation goal.
Greenspan and some other Fed officials oppose adopting a public inflation target, worrying that it might limit their flexibility to respond to an ever-changing economy.
Bernanke, however, noted in his opening remarks that he has long urged the Fed to clarify its goals by stating the inflation rate, or range of rates, it prefers. In academic papers and speeches, he has suggested a target of around 2 percent for consumer prices other than food and energy. He contends that would help the Fed hold down inflation and financial markets' expectations of future inflation.
Some senators expressed concern about whether such a move would cause Fed officials to focus more on inflation and be less committed to fostering job growth.
Bernanke assured senators that stating an inflation goal "would in no way reduce the importance of maximizing employment as a policy goal."
Indeed, he argued, a key reason to adopt an inflation target is the belief that low inflation will boost healthy employment.
Bernanke also sought to reassure skeptics that establishing an inflation target would not limit the central bank's options. Announcing an inflation goal, he said, would be "fully consistent with the Federal Reserve's current policy approach, including its appropriate emphasis on the role of judgment and flexibility in policymaking."
He also proposed that the Fed try to achieve the inflation target over the long term and not adhere to it rigidly in the short term.
Some analysts worried that Bernanke implied he might be willing to accept higher short-term inflation, a potentially unsettling signal to send as financial markets are bracing for a new Fed chairman.
"It was clear from the questions of the senators there are lingering concerns as to whether would-be chairman Bernanke thinks higher short-term levels of inflation are acceptable in exchange for longer-term price stability," said Nicolas Checa, a managing director with Kissinger McLarty Associates, an international consultancy.
But Bernanke also suggested that if confirmed, he would be in no rush to push the Fed to adopt an inflation target. He said the matter "requires further study at the Federal Reserve as well as extensive discussion and consultation. I would propose further action only if a consensus can be developed that taking such a step would further enhance the ability" of the Fed to achieve its goals of both low inflation and unemployment."
Bernanke succeeded in one short-term objective yesterday: None of his remarks rattled financial markets. Stock prices and bond yields were little changed yesterday.
Banking Committee Chairman Richard C. Shelby (R-Ala.) called Bernanke's nomination "a superb appointment" and predicted he would be confirmed easily. The committee is scheduled to vote today. If confirmed, he would become Fed chairman after Greenspan retires Jan. 31, after more than 18 years at the helm.
Bernanke said, "One may aspire to succeed Chairman Greenspan, but it will not be possible to replace him."