The Hindu Business Line : Bernanke does a Greenspan

IT was a much looked forward to event. Mr Ben Bernanke testified to the House Committee on Financial Services on February 15 - his first after becoming the Chairman of the U.S. Federal Reserve and Federal Open Market Committee (FOMC), the body which actually decides on American interest rates.

The market was in suspense. Would he say that he will continue with the now time-worn increase of 25bps in every FOMC meeting since June 2004? Or would he signal a shift in the Fed's stance to neutral?

More important, would he advocate and move the Fed towards a policy of inflation targeting in which price goals would shape monetary policy and interest rates? The US remains about the only major central bank without specific inflation objectives driving its decision-making.

Mr Greenspan had no faith in them, but Mr Bernanke has been their explicit supporter. It was, therefore, quite on the cards that he would sing the hosannas of price targets. But, surprisingly, he didn't make even a passing reference to them.

Clearly, Mr Bernanke does not want to rock the boat. The Fed's mandate is not only price stability but also promoting employment. A pure inflation focus - and heaven knows the pure monetarist always worries about inflation in prospect and retrospect, never matter the present - may cause damage to growth and jobs.

In fact, Mr Bernanke's testimony was as Greenspanish as they come. He said, more or less at the outset, "The FOMC will have to make ongoing, provisional judgements about the risks to inflation and growth." He believed that the public and investors felt confident about price stability.

This partly explains the prevailing low bond yields, which is in contrast to rising interest rates at the short end. Market confidence gives the Fed that much more leeway in policy.

Punchlines

The punchlines were, however, towards the end. Mr Bernanke was forthright in stating that "policy makers have learned that no single economic or financial indicator ... can provide reliable guidance for the setting of monetary policy. Rather ... successful conduct ... requires painstaking examination of a broad range of economic and financial data."

Mr Greenspan couldn't have put it better. Rule-based central banking is out and discretionary policy is in. Has Mr Bernanke already succumbed to the legendary persuasive powers of his predecessor?

We live in rapidly-changing times. There is no room for dogma or dogmatic approaches. Mr Greenspan, though an economist of the conservative hue, was happily no prisoner of the conservative school. Mr Bernanke too is not hidebound in his ideas. His 2003 push for sustained low interest rates till deflation risk is gone still echo in one's mind.

Mr Bernanke has made a good beginning. And that, as everyone knows, is half done.

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