StreetTalk: Transition at the Fed: From Greenspan to Bernanke - Bernanke appears to be operating on an even keel, albeit steering a vessel across stormy economic seas - BioPharm International


StreetTalk: Transition at the Fed: From Greenspan to Bernanke
Bernanke appears to be operating on an even keel, albeit steering a vessel across stormy economic seas

BioPharm International
Volume 19, Issue 8

Inflation Targeting

"Where [Bernanke] differs from Greenspan is that he is more in favor of explicitly putting a rule on monetary policy," says Victor Zarnowitz, a retired University of Chicago economist who now works at the Conference Board in New York City.

That rule involves what economists call "inflation targeting," a practice that has been embraced in other countries. It involves setting a public target for inflation, preferably between one and three percent based on the Consumer Price Index. This target is then used as a benchmark against which the central bank can be accountable.

Proponents of such targets, like Bernanke, view them as good for helping the Fed identify when it's time to clamp down on inflation (i.e., if rates exceed the designated range). They also see targets as a means for:
  • Providing greater confidence to investors in stocks, bonds, currency, and commodity markets, as they help clarify just where interest rates are headed.
  • Reining in expectations. After all, European countries that have adopted inflation targeting have successfully controlled inflation without sending markets into sharp gyrations.
  • Managing unemployment and inflation, and controlling the growth of the money supply by signaling when to adjust interest rates.
  • Building support for the Fed's actions. "The more guidance a central bank can provide to the public about how policy is likely to evolve," Bernanke said in 2004, "the greater the chance that market participants will make the appropriate inferences."

Opponents of inflation targets, have typically shied away from using them as a motivator. "Greenspan would [prefer to] rely on judgment, which in his case, depends so much on the judgment of a single man," says Zarnowitz. And, in fact, Greenspan has publicly expressed his reluctance in using targets, in favor of a more discretionary approach.

Critics worry that once you quantify an objective publicly, you become more accountable for it, and in the process, shift public attention to it, diminishing the visibility and viability of other important policies and initiatives.

No one knows how the market might react to publicly announced inflation targets. "The markets would have to learn," says Michael Levy, chief economist at Bank of America. He adds that because Bernanke's written extensively on inflation targets, his credibility and expertise on the topic will help to bring investors along.

Looking ahead, experts say that Bernanke's greatest challenge will be leading the Fed to act as a central bank for the world. This is something that Greenspan tried to embrace, despite the discomfort of some traditional economists. They argue that the Fed's primary mandate is to promote full employment and price stability at home.

Still, it's becoming increasingly obvious that achieving this domestic mandate is the best way to contribute to the economic stability of the world. Due to economic and financial integration it is becoming difficult for any government agency to compartmentalize itself and its policies.

Greenspan had his moments. He understood the importance of the world in setting monetary policy and participated by promoting cooperative research and solutions to common global policies (i.e., ranging from the Y2K transition and the aftermath of 9/11). His administration did it the careful way, choosing to be selective about the initiatives it undertook; engaging in international economic and financial issues only when they became too important to ignore.

Now, with Bernanke at the helm, it remains to be seen how he'll address these things. The betting here is that he will take a proactive approach in managing international financial affairs and transforming banks into global institutions—as well as cultivating the public's confidence in a central banking system that recognizes the need for growth and risk-taking that have come to define the life sciences market. Here's hoping Big Ben is up to the task.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939,

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