Bush nominates new Fed chairman

Posted in United States | 25-Oct-05 | Author: Edmund L. Andrews and Vikas Ba| Source: International Herald Tribune

Federal Reserve chairman Alan Greenspan (L) looks on with US President George W. Bush (R) after Bush nominated his top White House economic adviser Ben Bernanke (C) to be the new chairman of the Federal Reserve Board to succeed Greenspan.
WASHINGTON President George W. Bush on Monday nominated Ben Bernanke, his top economic adviser, to replace Alan Greenspan as chairman of the U.S. Federal Reserve Board, handing management of the world's most powerful central bank to a nonideologue who is widely respected by liberals and conservatives.

Calling him the "right man to build on the record that Alan Greenspan has built," Bush said Bernanke had "built a record of excellence as both economist and policy maker." He spoke at the White House flanked by Bernanke and Greenspan.

Bernanke, 51, sought to reassure investors in brief remarks that there would be few immediate changes at the Fed when he took over early next year. He praised Greenspan and said he would work with colleagues at the Federal Reserve to "ensure the prosperity of the American economy."

"If I am confirmed to this position, my first priority will be to maintain consistency and continuity with the policies established during the Greenspan years," Bernanke said.

He will take over an economy that has proved resilient under pressure from higher energy prices and devastating hurricanes. His biggest challenges will be the prospect of broader inflation and lower consumer spending caused by higher oil, gasoline and heating costs.

A former Federal Reserve governor, Bernanke has long been considered the favorite for the post, according to political experts, Wall Street analysts and economists. Bush appointed Bernanke, a Republican and former professor at Princeton, to head the White House Council of Economic Advisers earlier this year.

Other candidates considered to have been on the short list were R.Glenn Hubbard, a former top adviser to Bush and an architect of the president's tax cuts, and Martin Feldstein, a Harvard economics professor and president of the National Bureau of Economic Research.

Greenspan is expected to step down Jan. 31 and will be the second-longest serving chairman of the Fed after William McChesney Martin Jr.

He is widely credited for helping foster the economic boom of the 1990s and blamed by some for not doing enough to rein in the financial excesses of the decade.

In a statement, Greenspan said Bernanke came with "superb academic credentials and important insights into the ways our economy functions." He added, "I have no doubt that he will be a credit to the nation as chairman of the Federal Reserve Board."

Bernanke (pronounced ber-NANK-ee) is a respected economist who has assiduously stayed away from partisan politics until his appointment to the White House post, friends and colleagues said. He studied economic history at Harvard and then earned a doctorate in economics at the Massachusetts Institute of Technology.

Earlier this month, Bush said he hoped to nominate someone independent from politics. But he has also made it clear that he would like to have a personal rapport with the candidate. Given the Fed's critical role in guiding the economy, the candidate would also have to reassure Wall Street.

The stock market rose broadly after the announcement.

Senator Charles Schumer, Democrat of New York, said: "We need a careful, nonideological person who understands that the Federal Reserve's main job is to fight inflation and Ben Bernanke seems to fit that bill. But an important question remains and will hopefully be answered at his confirmation hearing - will Bernanke adopt the Greenspan model of flexibility in monetary policy that has served our economy so well?"

Since June 2004, the Fed has raised short-term interest rates 11 times, to 3.75 percent, and officials have recently signaled they would continue raising rates to head off any inflation spillover from high energy costs.

The consumer price index jumped to an annual rate of 4.7 percent last month, mostly reflecting higher energy costs. Excluding energy and food, the core inflation rate was 2 percent.

"The departing chairman will have done much of the hard work of tightening before the appointment of the new chairman," Richard Hoey, chief economist and investment strategist of Dreyfus, the mutual fund company, wrote in a note to clients.

The Federal Open Market Committee, the Fed panel that sets interest rates, will have three more meetings before Greenspan is expected to leave, on Nov. 1, Dec. 13 and Jan. 31.

Bernanke has been a vocal advocate of setting an explicit inflation target that can be used to both guide monetary policy and make it easier for investors to anticipate Fed policy. The Bank of England has used an inflation target - now at 2.5 percent - since 1992.

But Greenspan has opposed the idea of an explicit inflation target because it would reduce the Fed's flexibility and be hard to carry out in practice.

Bernanke responded to those concerns in a speech in October 2003, when he said that any inflation target would be considered a long-term goal and that the Fed would not set a "fixed time frame for reaching it." He also acknowledged the political concerns an official inflation target would raise and said they could be allayed with deftly worded provisions that preserved the Fed's flexibility.

"We would have the explicit proviso that important short-run economic and financial goals will not be sacrificed in order to reach the long-term inflation objective more quickly," he said in that speech at the Federal Reserve Bank of St. Louis, Missouri. "Although it would be important to vet these ideas thoroughly with the relevant congressional committees before proceeding, I am hopeful that a change of the type I am proposing would be acceptable to Congress as being within the spirit of existing legislation."

As a governor on the Federal Reserve Board from 2002 to earlier this year, Bernanke has also spoken bluntly about weakness in the job market, the dangers of deflation, the effects of high oil prices and the need for the Fed to be more open to reduce uncertainty.

"If monetary policy is like driving a car," he said last December, "then the car is one that has an unreliable speedometer, a foggy windshield and a tendency to respond unpredictably."

In Europe, Jean-Claude Trichet, the president of the European Central Bank, welcomed the appointment. "I will be very happy to have the possibility to develop with him the same highly close and fruitful cooperation, and enjoy the same confident and friendly personal relationship that I had with Alan Greenspan," Trichet said through a representative.

The Bank of England governor, Mervyn King, added, "It will not be easy to follow in Alan Greenspan's footsteps, but Ben has the intellectual and personal qualities to lead the Federal Reserve in the years ahead."