Thu, Nov 17, 2005 page12

• Bernanke pleases senators at hearing

  CONFIRMATION PROCESS The Senate Banking Committee made it clear that it is almost certain to approve the economist, but it warned him to maintain independence

  • NY TIMES NEWS SERVICE
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  Ben Bernanke, the nominee to succeed Alan Greenspan as chairman of the US Federal Reserve, told lawmakers on Tuesday that it was a "false dichotomy" to assume that low inflation was at odds with rising wages and greater income equality.

  "Middle-income living standards, and poverty for that matter, are best addressed through employment growth," Bernanke said at his confirmation hearing before the Senate Banking Committee.

  "By maintaining low inflation and low expectations of inflation, you can create new employment," he said.

  In his first extended public appearance since President George W. Bush nominated him to lead the Fed, Bernanke stoutly defended his proposal to base monetary policy on an explicit target for inflation and insisted that he would not weaken the central bank's "dual mandate" of promoting full employment as well as stable prices.

  But he said he would proceed cautiously and seek consensus within the Fed before moving policy toward inflation targeting, one of the few areas of policy where Bernanke differs from Greenspan.

  And in describing his approach he sharply distanced it from those of some central banks that focus on almost exclusively on an inflation target and not at all on promoting growth.

  "I don't agree with that," Bernanke declared flatly.

  Members of the committee, while making clear that Bernanke enjoys overwhelming support in the Senate and is all but certain to be confirmed soon, also warned him to maintain independence from the White House, where he served as Bush's chief economic adviser.

  "I assure this committee that, if I am confirmed, I will be strictly independent of all political influences," Bernanke said in his opening statement.

  Bernanke also strongly implied that the Fed did not necessarily need to raise interest rates in response to soaring energy prices, noting that long-run inflation expectations remain "well-anchored."

  Lawmakers were reassured by his statements.

  Senator Richard Shelby, a Republican and chairman of the banking committee, said that Bernanke "may well be the finest monetary economist of his generation."

  Democrats praised his academic credentials, and spent most of their time coaxing assurances from Bernanke about his support for employment and about his political independence.

  But in stressing his flexibility, Bernanke raised almost as many questions as he answered on how his proposal for a clear inflation objective would increase the Fed's credibility in financial markets.

  He noted that there would be times when inflation climbed faster than the Fed's long-term goal and yet did not constitute a long-run threat, largely because investors and consumers now expected inflation to remain low in the long run.

  "The contrast between the 1970s and today is very marked," Bernanke said, in response to questions from Senator Chris Dodd, a Democrat, on how he would react if natural gas prices spiked sharply this winter.

  "Back then, we had high inflation expectations," Bernanke said, adding that the Fed may have waited too long and then over-reacted to higher oil prices, helping push the economy into recession.

  Today, by contrast, "inflationary expectations remain well anchored" and the Fed could respond gently as long as those expectations remain low, he said.
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