Pity the poor incoming Federal Reserve chairman, Ben Bernanke. As well as having to fill the disproportionately large shoes of his predecessor, Alan Greenspan, Bernanke has to fulfill some disproportionately high expectations. As he sailed through his confirmation hearings, the general impression seemed to be that Bernanke as Fed chairman would be a lot like Greenspan, only better.
Much has been made of his determination to ensure the Fed remains flexible and to focus his efforts on controlling inflation. Both are noble goals, but on both counts Bernanke is already hamstrung by the actions of his predecessor. After months of steady monetary tightening, it appears that the US economy is on course for a gentle landing. But partly as a result of Greenspan’s comments, the markets have already discounted some further interest rate rises, and Bernanke has already hinted, perhaps with a view to establishing his inflation-fighting credentials, that he will maintain a tightening bias, at least for a while.
He is, in fact, caught in a classic Catch 22 situation. In order to make his mark, he has to do something. Unfortunately, if he does raise rates still further, Bernanke will be held accountable if economic growth in the US runs out of steam next year. His best move, if he is to achieve the economic stability for which he so explicitly yearns, is to do nothing. If he chooses this path, however, he may be accused of dithering.
Ironically, the ability to dither—constructively—is a key characteristic of a successful central banker. Strong, decisive action might play well in the media, but it can also lead to volatility in the economy. Established, successful central bankers know this, but there is a tendency among new central bankers to play a little heavily with the levers of economic management. Bernanke, with his determination to keep the Fed on its toes and ready to act, might find himself doing exactly that.
Tempting though it may be to make a bold policy move in order to stamp his authority on the Fed, Bernanke’s best strategy will be to sit on his hands. If he can do that, he’ll stand a good chance of living up to those great expectations—and becoming a worthy successor to Alan Greenspan.
Until next month, Dan Keeler