Thu, Oct 27, 2005 page9

• New Federal Reserve chairman seen as `steady hand'

  • AFP
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  Ben Bernanke, nominated on Monday to chair the US Federal Reserve, is seen in financial markets as a steady hand likely to continue most policies of chairman Alan Greenspan, although some question his credentials on fighting inflation.

  Bernanke, who spent three years as a member of the Fed before becoming head of US President George W. Bush's council of economic advisers, was nominated by Bush on Monday to replace Greenspan, who is retiring, as head of the powerful central bank.

  The 51-year-old Bernanke earned a reputation at the central bank for being the chief "hawk" on deflation at a time when the US economy was recovering from recession and the Sept. 11 terror attacks.

  But analysts point out that he has solid economic credentials from a career spanning two decades.

  Drew Matus, economist at Lehman Brothers, said the markets' reaction was favorable "largely because it's someone we know and, we were concerned it might be something like [Bush's controversial nomination of Harriet Miers at] the Supreme Court."

  Matus said he sees Bernanke as "someone who is a very steady hand, someone who the market knows and is not likely to change policy much."

  Matus added that Bernanke's comments at the White House helped reassure those who might have felt he was soft on inflation.

  Bernanke said he would maintain continuity with the policies and strategies of the long Greenspan era.

  "He was the chief deflation hawk but people have misinterpreted that to think he would be soft on inflation," Matus said.

  "He is an inflation targeter. So if we're at the high end of the range he will be an inflation hawk," he said.

  Still, some analysts are concerned Bernanke might not be as tough on inflation as Greenspan.

  "Today's nomination of Bernanke as Fed chairman is certainly positive for the equity markets and probably negative for the bond markets," said Tim Ghriskey, chief investment officer at New York-based hedge fund firm Solaris Asset Management.

  "His reputation in the investment community is that he's less hawkish than Greenspan on inflation and therefore less likely to raise rates aggressively in the face of inflation. That type of more liberal stance on interest rates scares the bond market, which fears inflation above everything else but cheers the stock market because it means more growth," Ghriskey said.

  "I don't think he's a loose-money dove," said Jeff Knight, chief investment officer of global asset allocation at Putnam Investments. "I view him has being process-oriented and adapting policies to maintain stability, rather then being so focused on deflation. Instead, today the threat is inflationary pressures."

  Others note Bernanke will have to prove his mettle to Wall Street.

  "Bernanke is not a strong markets person. Neither was Greenspan when he took over at the Fed," said Robert Brusca at FAO Economics.

  "So, on this score he will have to earn his respect. Bernanke is smart and one of the best-trained and most able economists to hold the top spot at the Fed. But he is replacing Greenspan, who may be the smoothest Fed operator ever," he said.

  Bernanke has previously spoken in favor of setting inflation targets, in the manner of central banks in Europe and Canada.

  David Watt at BMO Nesbitt Burns said the central bank "has been running a de facto inflation target anyway," so any move by Bernanke to formalize this "would not be a huge step."

  But Matus at Lehman Brothers said he does not expect a formal target from the Fed.

  "Bernanke is in favor of inflation targeting, but it's one thing to say that when you're an academic, and another thing when you're in charge of monetary policy," he said

  "Do you turn the power over to an economic model? Most people would probably rely on their gut instinct, which is what Greenspan has been known for," Matus said.
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