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US Fed Reserve enters Bernanke era

White House adviser Ben Bernanke won Senate approval on Tuesday to assume one of the world's most influential economic posts.

india Updated: Feb 01, 2006 12:45 IST
Reuters
Reuters
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White House adviser Ben Bernanke won Senate approval on Tuesday to assume one of the world's most influential economic posts -- chairman of the US Federal Reserve -- just after the central bank raised interest rates a 14th straight time.

In 19 minutes that marked a new era at the Fed, Capitol Hill lawmakers approved Bernanke by voice vote to succeed retiring Alan Greenspan and policy-makers lifted short-term rates a quarter percentage point to 4.5 per cent.

It was the 149th and final policy meeting for the outgoing Fed chief after 18-1/2 years in charge. Bernanke will be sworn in for a renewable four-year term as chairman and a 14-year board term at a private ceremony at the Fed on Wednesday.

"I know this institution will go on doing extraordinary things, and I will look on from the sidelines and cheer," Greenspan told 180 guests at a farewell luncheon of grilled salmon and chocolate cake after Tuesday's rate meeting.

Global financial markets will watch closely to assess what changes Bernanke, a former Fed governor, will make at the central bank now he has the top job.

Treasury bond prices fell after the meeting on the prospect the Fed has not finished a cycle that began in mid-2004, but later recovered. The dollar shook off early weakness while stocks closed lower.

Bernanke's nomination was so noncontroversial that some senators were quoted in newspapers expressing surprise that hearings on it had already been held.

"Ben has provided wise counsel and good advice as a member of my economic team, and he will serve our nation with great distinction," President George W Bush, who has a history of appointing insiders to top jobs, said in a statement.

SETTING UP TARGETS

Bernanke, 52, is a widely respected monetary economist and a vocal proponent of inflation targeting at the Fed, a move that would create more formal policy rules than practiced by Greenspan, who relied heavily on intuition and flexibility.

But analysts were not predicting seismic shifts.

"He'd like to bring in inflation targeting. (But) he must build consensus to do so and he doesn't have consensus now," said economist Diane Swonk of Mesirow Financial in Chicago, adding that change would be an "evolution."

Economist Mark Zandi of Economy.com in Holland, Pa, also sees Bernanke hewing to a steady course.

"He wants to ensure the consistency of conduct of policy to reassure the rest of the global economy that nothing basic has changed," Zandi said.

Bernanke was a Fed governor for three years before a June move to chair the White House Council of Economic Advisers. That helped him build a relationship with colleagues, one he has kept up through meetings with Fed Vice Chairman Roger Ferguson and Governor Donald Kohn among others.

Still, economists say he must earn the investor trust and inflation-fighting credibility his predecessor enjoyed.

Greenspan, 79, has led the US central bank since August 1987 -- the second-longest tenure in Fed history. And the man who has argued for a higher US retirement age plans to keep working, with a consulting business, plans for a book and speech bookings.

"Alan Greenspan was an institution for financial markets worldwide," Michael Heise, chief economist for Dresdner Bank in Frankfurt said on Tuesday.

MORE HIKES

Greenspan's success in keeping inflation curbed leaves his successor in a relatively strong starting spot.

Tuesday's Fed statement outlining the rate rise also gave Bernanke a free hand to chart his own course. Policy-makers altered the statement to say more rate rises "may" be necessary rather than that they are "likely."

A Reuters poll of top Wall Street economists after the decision found that 17 of 21 anticipate another rate rise at the March 28 meeting.

Some economists have said such a move would help Bernanke establish credentials as a "hawk" on prices and give him a chance to put his stamp on the Fed.

Unlike Greenspan, who waded into debates unrelated to Fed affairs, Bernanke has stressed he will not discuss legislative moves that do not directly affect monetary policy.

One area unlikely to change under Bernanke is the Fed's approach to surges in prices of assets like stocks and homes. Like Greenspan, he believes monetary policy is too blunt a tool to safely use on asset bubbles.

"One might as well try to perform brain surgery with a sledgehammer," Bernanke said in October 2002.

In one of his last speeches before moving to the White House, Bernanke argued an overseas savings "glut" was helping fund the US trade gap without financial distress, expressing hope global imbalances could be resolved without crisis.

That speech touched off a vigorous debate over global economic imbalances, which some economists think may contain the seeds of Bernanke's first crisis.

First Published: Feb 01, 2006 12:45 IST