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There is palpable
relief that Pres. Bush named someone considered qualified, not the family veterinarian,
to be the incoming Fed chief when Greenspan retires Jan. 31, 2006. No doubt we
will see much biographical analysis and predictions ahead, but here’s an first
read. This
announcement today also helps to move the ‘above the fold’ headlines off the storm
clouds the White House is facing over the Miers nomination, possible
indictments for senior staff by the special prosecutor in the CIA leak and rising
energy costs ahead for this winter, as Congress and the two political parties
make adjustments for further broadsides with Sen. Frist, the ongoing Abramoff
investigation and the AIPAC investigation underway. For
Bernanke, inflation heads list of risks By
Martin Wolk, Chief economics
correspondent, MSNBC, Updated: 1:43 p.m. ET Oct. 24, 2005 Although Federal
Reserve Chairman Alan Greenspan is departing the national stage with the
economy in relatively good shape, his designated successor Ben Bernanke faces a
daunting list of risks and potential pitfalls. At the top of the list
are rising inflation fueled by soaring energy prices and the possibility that
high-flying housing markets will come back to earth with a thud as mortgage
interest rates rise. President Bush Monday
nominated Bernanke, chairman of his Council of Economic Advisers and a former
Fed governor, to take over the central bank when Greenspan steps down Jan. 31.
The nomination is subject to approval by the Senate. Analysts say Bernanke
will have to act quickly to establish his credentials as an inflation fighter,
possibly by raising interest rates more aggressively than otherwise would have
been required. Bond prices fell on news of the nomination, sending long-term
interest rates slightly higher on concerns Bernanke might not be sufficiently
tough on inflation, market analysts said. Although the economy
faces daunting long-term challenges including a large federal budget deficit,
an intractable trade gap and a shortage of national savings, Greenspan has
achieved what most analysts describe as a smooth landing after the shocks of
the past several years. Even as the Fed has
steadily raised rates from their lowest levels in half a century, the economy
has added jobs steadily, pushing down the unemployment rate to about 5 percent.
Inflation is rising and consumer confidence is shaky, but there is little
evidence yet that rising fuel prices have spread to the broader economy or
crimped consumer spending. “It’s a storybook
ending to a wonderful career,” said Mark Zandi, chief economist at Economy.com. Yet the delicate
rate-hike campaign is not yet over, and the transition to a new Fed chief is
always filled with uncertainty and risk for financial markets. The stakes are
even higher today considering the high level of comfort professional investors
and the public at large have with Greenspan after his more than 18 years in
office. “(The Fed) has gotten
to be embodied in the person of the chairman to a degree that is unhelpful when
it comes time to appoint a new chairman,” said Pierre Ellis, senior economist
at Decision Economics. The cult of
personality that has evolved around Greenspan is one reason other Fed
policy-makers have been increasingly vocal in recent weeks, said Ellis.
Greenspan’s fellow governors and regional Fed presidents “have been making an
effort to speak as one” to reassure financial markets of the central bank’s
unwavering determination to keep simmering inflation under control. As a Fed governor,
Bernanke was best known for publicly raising the possibility the U.S. economy
could enter a damaging period of deflation much like what Japan went through in
the 1990s. Economists who have followed Bernanke's career say there is no
reason to think he would be any less aggressive in fighting inflation, but
financial markets always react skeptically to a new Fed chief. The onset of G.
William Miller’s brief 17-month tenure in March 1978 ushered in a dollar
crisis, and bond markets “tanked” when Paul Volcker took over in 1979,
Morgan Stanley chief economist Stephen Roach noted in a recent commentary. Bond
prices also fell in 1987 when Greenspan was named to succeed Paul Volcker, who
had earned Wall Street’s respect by breaking the back of inflation in the early
1980s, although at the cost of two difficult recessions. Then just two months
after taking office, Greenspan faced one of the most difficult tests of his
term when the Dow Jones industrial average lost 23 percent in a single day and
financial market operations nearly melted down. “Just from that
perspective alone, there’s good reason to worry about the markets in early
2006,” Roach said. Few economists are
expecting that kind of doomsday scenario to greet Bernanke, who is expected to
win relatively easy confirmation from the Senate. But there is little doubt the
new chief will be severely tested in a term that is scheduled to run at least
four years and could go as long as 14 years if he is reappointed by future
presidents. The value of a Fed
chief “is when the economy is in crisis, how they manage through that
crisis,” said Zandi. “That is what made Greenspan so valuable and so
successful.” His vote for the most
likely source of the next financial crisis: The red-hot housing market. “I think there likely
will be some credit problems as the housing market cools and prices weaken,” he
said. “Under a dark scenario, global buyers could start selling mortgage-backed
securities, and it would be in that environment that a crisis could unfold.” Other analysts point
to the housing market as well as to the possibility that energy prices — which
have moderated slightly after the disruptions of Hurricanes Katrina and Rita —
could rise again next year. Although financial
markets could be a bit jittery as the Fed prepares for its first leadership
change since the 1980s, investors are likely to encouraged by President Bush's
choice of the favorite candidate, who has both extensive Fed experience and a
strong economic pedigree. In any case there it
would not be surprising to see Bernanke boost interest rates at the first
opportunity — as Greenspan himself did in 1987 — to establish or reinforce his
credentials as an inflation-fighter. Not everyone agrees
that Bernanke will have to act aggressively. Most forecasters figure the Fed
will raise interest rates at least two more times before Greenspan’s Jan. 31
retirement, pushing the benchmark overnight rate to over 4 percent,
compared with 1 percent when the Fed began tightening in mid-2004. Economists figure the
current “neutral” federal funds rate is between 4 and 5 percent, so if the Fed
pushes up rates at Greenspan’s final meeting Bernanke might legitimately call
for a pause at his first or second meeting next year. Raising rates is not
the only way a new Fed chairman can establish his inflation bona fides, said
Richard DeKaser, chief economist for National City. “The easy way for the
incoming chairman to do this is simply using the bully pulpit and express their
concerns about rising inflation pressures,” he said. “They can basically talk
the talk. A more assertive posture would be to walk the walk.” © 2005 MSNBC Interactive http://www.msnbc.msn.com/id/9777329/ |
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