WASHINGTON—Investors, economists and members of Congress welcomed President Bush's selection of Ben Bernanke to head the Federal Reserve on Monday, expecting him to stay the course set by retiring Fed Chairman Alan Greenspan.
Stocks rallied as word of Bush's choice spread on Wall Street. Bernanke, a widely respected economist who serves as Bush's chief economic adviser, said his first priority would be to "maintain continuity with the policies" established during Greenspan's 18 years as the head of the nation's banking and monetary system.
Bernanke, 51, is expected to have little trouble winning Senate confirmation before Greenspan's planned retirement on Jan. 31.
After a lifetime of stellar academic work, most recently as chairman of the economics department at Princeton University, Bernanke (pronounced ber-NAN-kee) was a member of the Fed's Board of Governors from August 2002 until June, when he became president of the White House Council of Economic Advisers.
The move to the White House was interpreted as a trial run to see how his views meshed with the president's. Bush said Bernanke is "the right man to build on the record Alan Greenspan has established."
Like Greenspan, Bernanke views inflation as a major threat to economic growth and favors keeping it strictly in check, lest it distort investment decisions and undermine economic stability, as in the 1970s. He also shares Greenspan's preference for more openness in the Fed's oversight of interest rates and monetary policy; in fact, he stresses that much more than Greenspan does.
Although most of its work is largely out of public view, the Federal Reserve Board touches the life of every American. By controlling short-term interest rates and the nation's money supply, the board can encourage economic growth or tap the brakes to restrain inflation, the rate at which prices rise across the economy.
Bernanke promised to use his appointment to "help ensure the continued prosperity and stability of the American economy."
His nomination came with Greenspan's blessing.
"Ben comes with superb academic credentials and important insights into the ways our economy functions. I have no doubt that he will be a credit to the nation as chairman of the Federal Reserve Board," the outgoing Fed chairman said.
Martin Feldstein, a noted Harvard University economist who was said to be on Bush's short list of potential Fed chairmen, along with Bernanke, praised him.
"Ben Bernanke is a first-rate monetary economist," he said.
Members of Congress from both parties also praised the choice.
"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," said Sen. Charles Schumer, D-N.Y., in a statement. Schumer sits on the Senate Banking Committee, which will hold hearings on Bernanke's appointment prior to the full Senate's confirmation vote.
White House spokesman Scott McClellan said Bush started his search for Greenspan's replacement in April by creating a team that sought advice from Wall Street executives, academics, the business community and Greenspan.
The search team included Vice President Dick Cheney, White House Chief of Staff Andrew Card and I. Lewis "Scooter" Libby, Cheney's chief of staff and a key player in the CIA leak investigation. After culling through a list of more than 20 names, the team gave Bush information on several candidates.
McClellan said Bush called Bernanke from Air Force One to discuss the nomination on Friday but didn't formally offer the job until Monday morning.
Bearded and scholarly, Bernanke is less a political operator than Greenspan. The soft-spoken Bernanke jokes that he got his training for the rough-and-tumble world of Washington while serving on a local elected school board in New Jersey.
But no one questions his intellect.
Bernanke, the son of a small-town pharmacist in Dillon, S.C., has a long record of academic achievement. He won the state spelling bee in the sixth grade, taught himself calculus because his high school didn't offer it and outscored every other student in the state when he took the college admission test.
He graduated with highest honors from Harvard University in 1975 and earned a Ph.D. in economics from the Massachusetts Institute of Technology four years later. He made his reputation as a professor at Princeton, specializing in the analysis and history of monetary policy. His study of the Great Depression concluded that its severity was caused not by financial markets but by the Fed's errant monetary policy.
He's also the co-author of a popular college textbook titled "Macroeconomics," which is in its fourth edition. Adam Posen, who co-authored a 1999 book on inflation with Bernanke, called him one of the top economists of his generation.
"There are plenty of manipulative and egomaniacal people in the economics profession, particularly among people who thought they might become Fed chairman. Nobody says that about Bernanke," said Posen, a former Fed economist and now a senior fellow at the Institute for International Economics in Washington. "This is the real thing, and he is just a good guy."
Bernanke and his wife, Anna, have two children.
Although Bernanke once said that he expected to become "an academic lifer," his appointment to the Fed's governing board gave him a chance to put his ideas to work.
While Bernanke paid tribute to Greenspan in accepting the nomination as Fed chairman, he also signaled that he wouldn't be a Greenspan clone. Unlike Greenspan, Bernanke has suggested that the Fed should set clear targets for inflation and manipulate interest rates to meet them, rather than leaving such rate decisions so much to subjective judgment.
"Our understanding of the best practice in monetary policy evolved during Alan Greenspan's tenure at the Fed, and it will continue to evolve in the future," Bernanke said.
John Lonski, chief economist for Moody's Investor Service in New York, said Bernanke may be a bit more dovish about inflation than Greenspan. Under Greenspan, the Fed has raised interest rates 11 times since June 2004 in an aggressive pre-emptive strike against inflation.
Another interest rate hike is expected at the board's next meeting on Nov. 1.
"What they (investors) like about Bernanke is they believe he will be less inclined to pursue or confront any buildup on inflation risks as aggressively as Alan Greenspan was known to do," said Lonski.
By anyone's account, Bernanke has big shoes to fill.
Since he was selected to run the Fed by President Ronald Reagan in 1987, Greenspan has become legendary as the maestro of the U.S. economy. While serving under four presidents, from both parties, Greenspan guided the economy through two stock market crashes, several global financial crises, two mild recessions, a raft of corporate scandals and the 2001 terrorist attacks on the nation's financial nerve center in New York.
Despite all that, the Greenspan era will be remembered overall as one of unprecedented prosperity.
At age 79, he's become a Washington fixture and an international symbol of economic stability. Bush called him "a legend" who "dominated his age like no central banker in history."
Investors and financial analysts who have become accustomed to parsing Greenspan's deliberately dense forecasts might have an easier time with Bernanke.
"You'll find that Ben Bernanke will resort more to plain speaking when describing economic activity and offering hints about the possible direction of Fed policy. I would expect Bernanke will be less obtuse than Alan Greenspan was," said Lonski of Moody's.
How the Fed works:
The Federal Reserve Board is charged with numerous missions, including regulating banks, but its real power lies in its control of the money supply and short-term lending rates, which guide the economy.
As the nation's central bank, the Fed is charged with expanding the economy and promoting price stability. The governing board has seven members, called governors, who are nominated by the president and confirmed by the Senate for 14-year terms. The chairman of the Fed comes from the pool of governors and is nominated for a four-year term.
The bank's policymaking arm, the 18-member Federal Open Markets Committee, meets eight times a year to set the benchmark short-term lending rate—the federal funds rate—that serves as a guiding benchmark for commercial bank loans. It's the overnight loan rate that banks charge each other.
The current Fed chairman, Alan Greenspan, presided over the Fed for 18 years, a period of remarkable economic change and overall prosperity. Part of his legacy is his success in leading the Fed's governing committee to consensus behind his judgment. Greenspan understood in the 1990s that rising productivity was behind the booming U.S. economy and allowed interest rates to stay low.
Ben Bernanke, if confirmed, will face an economy subject to more foreign influence than ever before, thanks to globalization and the nation's budget and trade deficits, which are financed by foreign capital. Those factors may constrain the Fed's freedom of action. If foreigners begin shifting their capital into other areas, the Fed may have to raise U.S. rates higher than would be good for the domestic economy, simply to lure the foreign capital necessary to finance U.S. deficits.
(c) 2005, Knight Ridder/Tribune Information Services.
ARCHIVE PHOTO on KRT Direct (from KRT Photo Service, 202-383-6099): Ben Bernanke
PHOTOS (from KRT Photo Service, 202-383-6099): Ben Bernanke
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