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After a year on the job, Bernanke has earned his spurs

WASHINGTON—Since becoming the chairman of the Federal Reserve last Feb. 1, Ben S. Bernanke has steered the U.S. economy to an apparent soft landing amid a housing recession, stepped out from behind his predecessor's long shadow and made decision-making more democratic atop one of the world's most powerful but little-known institutions.

These are no small feats, and they're why Bernanke gets high marks as his rookie year comes to a close.

Bernanke, a quiet, bearded man, had the thankless task of following the 18-year tenure of Alan Greenspan, whom admirers call "the greatest central banker ever." Bernanke had plenty of room for things to go horribly wrong, as nervous financial markets were set to totter at his first display of uncertainty rooted in inexperience.

Passing the baton at the Fed is as rare as a new pope. There have been only three Fed chairmen since August 1979. To make matters even more challenging, Bernanke, 53, stepped onto the world stage after the easy work had been done.

Greenspan had sent interest rates to a historic low of 1 percent after the Sept. 11 terrorist attacks, then gradually raised them to 4.5 percent by the time Bernanke took over. By then it was difficult to know when to stop tightening credit so late in a business cycle. The impact from a rate hike lags months after it's set, so knowing when to stop raising them is like knowing where to land an airplane in the dark.

Last August, Bernanke put the brakes on a string of 17 consecutive rate hikes dating to June 2004. He's also begun a more participatory decision-making process at meetings to set interest rates. And he's pushed policies to communicate the Fed's thinking better, to manage expectations in financial markets.

Nevertheless, his rookie year wasn't without bumps.

Last April, his remarks to Congress led markets to think that a pause in rate hikes had arrived. Thinking he was off the record, Bernanke later commented to a CNBC reporter that the markets had misunderstood his congressional testimony. When CNBC reported this, financial markets roiled.

But on balance, experts praise Bernanke.

"So much of what Alan Greenspan did seemed to be by instinct, and it's not something you learn in the university, but through experience. And Bernanke is a good bit younger than Alan Greenspan, so many felt there would be a little bit of a learning curve. That may be one of the biggest surprises; there doesn't appear to be much of a learning curve," said Mark Vitner, senior economist at Wachovia Bank in Charlotte, N.C. "The threat of inflation and any concern that the economy might be slowing too much both appear to be fading."

Before he went to the Fed, Bernanke headed President Bush's Council of Economic Advisers for seven months, and his successor there lauds his performance:

"Ben has proven himself to be a distinguished alumnus of the Council of Economic Advisers," said Ed Lazear, the council's chairman. "Like his predecessor Alan Greenspan, who was also a chairman of the council, Ben has shown a deep understanding of the economy, and all indications are that he has managed his responsibilities exceptionally well during the first year of his term."

Former Fed members salute him.

"I think he's done very well. When he took over, rates were rising. It was not clear how much longer they might be rising, when they ought to stop, and I think they got it just about right," said Edward M. Gramlich, a former Fed governor who sat on the rate-setting Federal Open Market Committee from 1997 to 2005.

When Bernanke was sworn in, there'd been 14 consecutive quarter-point hikes in the Fed's benchmark interest rate. After three more quarter-point hikes, Bernanke paused last August and has held rates steady at 5.25 percent ever since.

He's resisted pressure to cut rates to offset the ill effects of a deep nationwide housing slowdown. Last year, the housing market suffered its first annual decline in home prices since the Great Depression.

He's also resisted calls to raise rates from those who feared that core inflation—the general level of rising prices, excluding volatile food and energy—was running as high as 2.4 percent in October, well above the Fed's comfort zone of 1 to 2 percent.

Along the way, he brought a stylistic change to the institution. In a move unheard of by the older, more aloof Greenspan, Bernanke often lunches in the Fed cafeteria, schmoozing with junior economists and bureaucrats. He's even found time to shoot hoops in the Fed basement, one of Washington's most off-limits buildings. (Only three sitting U.S. presidents have ever stepped inside the Eccles Building.)

Few Americans can name the Fed chairman, but his influence over money, credit and the economy makes him vital to our national well-being.

The Fed controls the money supply. It seeks to boost employment while dampening inflation. It does so primarily by setting a benchmark rate for lending that banks and other lenders generally follow.

This "federal funds rate"—the fee banks charge each other for overnight loans _serves to stimulate or slow the economy. When economic growth is very slow, the Fed cuts rates to fuel borrowing, investment and spending. When inflation runs high, rates are raised to reduce fuel to the economy and slow it down.

Bernanke took charge at a time when it wasn't clear whether interest rates should rise, hold steady or fall. Best known as a wonkish academic from Princeton University, he lacked the Wall Street credibility of his predecessor.

Was the U.S. economy turning south or north? Experts disagreed. Analysts debated whether the nation was experiencing a "Goldilocks economy," one that was neither too hot nor too cold.

Today, few experts question Bernanke's fitness for the job. Those who've served at the Fed—an institution so secretive that full transcripts of its meetings aren't published for five years—commend him for fostering a more collegial, democratic air.

"There are much more opportunities for interaction and exchange. ... The meetings tend to have a greater degree of spontaneity. There's much more of a sense that it is a working meeting," said Laurence H. Meyer, a Fed governor from 1996 to 2002 and the author of "A Term at the Fed," a rare insider's look. "This is not a democracy, but I think the meetings are run in a way that is much more effective than previously."

Under Greenspan, the Federal Open Market Committee's eight-a-year meetings were predictable affairs. After staff briefings in the ornate Board Room, the presidents of the 12 regional Fed banks spoke, followed by members of the board of governors. After a break, the staff laid out options for interest rates, then Greenspan suggested a course of action. He'd take comments, but once he spoke, it was pretty much done.

Bernanke's style differs. When reviewing the economy, he speaks last. Then the staff lays out policy options. All policymakers at the 27-foot, 2-ton mahogany and granite table voice their opinions before a decision is reached.

He also instituted a "two-handed rule," which broke Fed tradition. Those who want to speak signal with one hand to get on the list of speakers, but if they want to challenge, debate or clarify something that others said, they signal with two hands. That jumps them to the front of the line.

"I don't think the FOMC looks that different from the outside. But it feels different from the inside," said Meyer, who's now a private forecaster.

"And I think we will see more changes on the appearance of the outside as some of the changes under discussion come to fruition."

He's referring to Bernanke's desire for inflation targeting, setting explicit targets for the range that the Fed wants to contain inflation. There's already an implicit comfort zone of 1 to 2 percent, but Bernanke thinks that an explicit target would signal more clearly what the Fed's course of action is likely to be, reducing speculation in financial markets. He's formed a communication committee and is expected to make some initial steps toward inflation targeting this year.



When Fed Chairman Ben Bernanke is credited with steering the U.S. economy to a "soft landing," what does that mean?

The metaphor describes the challenge that the Fed faces when it's trying to slow economic growth to tamp down inflation while avoiding slowing it so much that it crashes into recession. A "hard landing" would be recession. A "soft landing" is a successful slowdown that eases inflation while the economy continues to grow, albeit more slowly.

The Fed slowed the economy by raising interest rates 17 straight times starting in June 2004; its benchmark interest rate rose from 1 percent to 5.25 percent.

Over that time, economic growth slowed from a 4 percent annual rate to 2 percent as of the July-September quarter of 2006. Consumer price inflation rose at a 3.4 percent annual rate in 2005, but slowed to a 2.2 percent annual rate through the first 11 months of 2006.

So inflation was cut but economic growth continued, although more slowly than before.


(c) 2007, McClatchy-Tribune Information Services.

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