washingtonpost.com
Bush Names Greenspan Successor
Economic Adviser Ben Bernanke Next Federal Reserve Chairman

Beth Ann Bovino
Senior Economist, Standard and Poor's
Monday, October 24, 2005 2:00 PM

Beth Ann Bovino, senior economist at Standard and Poor's, was online Monday, Oct. 24, at 2 p.m. ET to discuss the President's expected announcement that economic adviser Ben Bernanke will be the succeed Alan Greenspan as Federal Reserve Chairman.

The transcript follows.

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Hartford, Conn.: Do you think the new fed chief will continue the current administration's assault on the middle class of America by raising interest rates anytime it looks like wages might go up, for anyone other than CEO's?

Beth Ann Bovino: We believe Greenspan was committed to raise rates to what he believes is the "neutral rate". While hard to pinpoint an exact figure, the neutral rate is sometimes defined as the policy rate that is neither inflationary nor deflationary. As a result the new Fed chief will not likely need to raise rates until something happens to change the outlook. Unfortunately wages are a component of inflation and will be one of the indicators he will watch.

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New York, N.Y.: Good afternoon Beth,

Thanks for taking my question.

While it seems like Bernanke is qualified, will another pick by Bush from his inner circle lead to more questions about cronyism?

Beth Ann Bovino: Hi, Some questions about cronyism may arise. But Bernanke is well qualified and was known before Bush. Moreover, given he was just confirmed as Chairman of the Council of Economic Advisers last summer, it should be small

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Jacksonville, Fla.: What can we expect from the new chairman regarding deficits, tax cuts and tax increases

Beth Ann Bovino: Mr Bernanke has stressed that deficit-reduction should still be a priority. He has suggested that a global savings glut is flooding America with cheap money, and that the government deficits may in large part have been mopping up surplus capital that would otherwise have been borrowed by America's already debt-ridden consumers. I think it avoids addressing damages from the growing deficit. Bernanke's political alliance may encourage more comments for spending cuts rather than tax cuts.

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Arlington, Va.: Nominates his economic advisor? Do you have any impression of this man? To be blunt, would it be fair to consider this another crony? Fair or not, will Bush opponents try to spin it that way?

Beth Ann Bovino: Dr. Bernanke has probably the best academic qualification for the job in Fed history, as one of the leading experts in monetary theory as Professor at Princeton. His Fed board experience helps him with inside knowledge of the Fed and financial markets. He also has gotten to know the major figures in Washington. While that may hint at cronyism, it should help facilitate his transition into the position. While not known how he will act, we expect his strong economic credentials should override political leanings.

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Silver Spring, Md.: Hi and thanks for taking my question. In The Post story about Bernanke, it says that he and Greenspan differ on whether the Fed should set targets for inflation. Can you explain this in layman's terms for me? What do these targets do?

Beth Ann Bovino: Inflation-targeting generally identifies price

stability as the primary objective. They can set an

explicit numerical target for inflation and set a

period over which any deviation of inflation from

its target is to be eliminated. However, although some central bankers provide escape clauses and other flexibility related to the pace of return. While Bernanke is a proponent of inflation targeting, we expect he will stay close to Greenspan more flexible mandate. He will probably shift the Fed toward more explicit targeting. We doubt he will move to an inflation-only target.

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Richmond, Va.: From what I read, this gentleman is well qualified for the position. My question is does he have the tenacity to withstand a huge economic crisis? I know he has experience in the academic and board room setting but is he strong on pressure?

Beth Ann Bovino: I agree with your reading. Bernanke is one of the leading experts in monetary theory. While he has little experience in private markets, his time on the Fed board from 2002 has given him inside knowledge of the Fed and financial markets. While it's hard to know for sure if he will be able to withstand a crisis, his background suggests he will succeed.

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Hummelstown, Pa.: "However, Bernanke and Greenspan differ on whether the Fed should set targets for inflation. Bernanke believes the Fed should set such targets, while Greenspan does not." This is a quote from a washingtonpost.com article this morning, so can you explain this system and what it means and why Greenspan was not if favor of it?

Beth Ann Bovino: That's right. Ben Bernanke was a strong supporter of inflation targeting as an academic. He will probably shift the Fed toward more explicit targeting. But it's unlikely he will move to an inflation-only target.

Beth Ann Bovino: That's right. Ben Bernanke was a strong supporter of inflation targeting as an academic. He will probably shift the Fed toward more explicit targeting. But it's unlikely he will move to an inflation-only target.

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Harrisburg, Pa.: Does the nominee have a "paper trail" of an economic philosophy of interest rates?

Beth Ann Bovino: In Fed history, Dr. Bernanke has probably probably the strongest academic qualification for job as chairman. As a professor at Princeton he is one of the leading experts in monetary theory. There are a number of papers and public statements that should make his position relatively transparent

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West Lafayette, Ind.: Do you think that Greenspan's excellent policy reputation is capitalized into stock values, interest rates or the value of the dollar? If so, how will the transition to Bernanke, even as well-qualified as he is, affect the markets?

Beth Ann Bovino: While he had little direct experience in private markets, Bernanke's years at the Fed, and strong academic skills should support his transition as Fed Chairman. While it's hard to say how his tenure will turn out, he was a key figure during the trying times after the 2001 recession to suggest he will be a good chairman. The markets reaction to the nomination, seem to support this view.

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Alexandria, Va.: Does he have any opponents? If there there a red flag (according to any detractors) to this nomination and what is it?

Beth Ann Bovino: While I'm sure he has opponents, Professor Bernanke was just confirmed as Chairman of the Council of Economic Advisers last summer. Thus the nomination for Fed Chairman should go smoothly.

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Costa Mesa, Calif.: I've wondered if Alan Greenspan/FOMC as a group, in the name of fighting anticipated inflation (despite lack of core inflation), has been building some "wiggle room" for his successor into the rate. Not so sure these monotonous little increases will continue after January. Any thoughts?

Beth Ann Bovino: Yes, I believe that Greenspan has wanted to raise rate to what he believes is a neutral rate before he leaves. Likely so that the new chairman won't have to raise rates immediately upon his arrival. As a result Bernanke will not have to change rates until something happens to change the outlook. This suggest that rates are likely to be stable for most of the first year of his tenure.

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washingtonpost.com: Thank you all for joining us today.

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