The Hindu Business Line : Ben Bernanke: A safe pair of hands?

President Bush announced on Monday that the Chairman of his Council of Economic Advisers would succeed Mr Alan Greenspan as Chairman of the US Federal Reserve on January 31, 2006, when Mr Greenspan retires from office. (Readers of this column would not have been surprised. Mr Ben Bernanke was spotted as the Fed's rising star way ago in mid-2003 and a strong contender for Mr Greenspan's chair — see Financial Scan July 30, 2003).

What does a new man at the helm of affairs in the world's most important and powerful central bank mean for the US and the rest of the world?

Wall Street, at least initially, seems to have no doubts. Mr Bernanke's appointment was clearly seen as a positive and the Dow Jones Industrial Average jumped 169 points in its Monday session. Japan's Nikkei rose sharply on Tuesday as did our Sensex.

So are markets going to be as comfortable with Mr Bernanke as they were with Mr Greenspan? The initial signals certainly suggest so.

Greenspan's is a pair of proven, safe, trusted hands. Under his leadership, the Fed reached new heights of transparency in policy and decision-making. During the rate-cutting phase from early 2001 to 2004, it was clear in its message that inflation was dropping significantly and there was even the risk of deflation. Thus, it was able to confidently state in meeting after meeting that rates would be kept low for "a considerable period of time".

The tightening mode started in June 2004 and is still continuing. Recent utterances of Mr Greenspan and other Fed Governors have focused on inflation concerns and the prognosis is for further increases in Fed rates. But such is Mr Greenspan's aura ("he will somehow make sure that inflation will not surface") that long-term bond yields have fallen since the Fed started tightening.

Beyond all these is the question of Mr Greenspan's philosophy vs Mr Bernanke's on monetary policy and interest rates. Mr Greenspan believed in a discretionary approach, sifting through mountains of data to judge the patterns and trends of growth, employment, productivity and inflation and evolve policy.

Mr Bernanke, on the other hand, thinks inflation targets should drive the Fed's stance — an idea pooh-poohed by Mr Greenspan. Will Mr Bernanke try immediately to shift to price goals or do so gradually?

In the ultimate analysis what is important is that Mr Bernanke will not rock the boat. He did say after the announcement of his appointment that he will continue the Greenspan legacy at the Fed. That and his Federal Open Market Committee experience during Mr Greenspan's stewardship should reassure markets that all will be well at the Fed even after the maestro's retirement.

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