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updated 10/24/2005 5:24:18 PM ET 2005-10-24T21:24:18
NEWS ANALYSIS

It was a fashion faux pas of the first order. Ben S. Bernanke, the man nominated by President Bush to take over as chairman of the Federal Reserve in early 2006, wore tan socks with a dark suit to a meeting in the White House. The President pounced, calling the attention of other policymakers in attendance to the unfashionable attire. Undeterred, Bernanke, who's currently serving as chief economist to Bush, convinced Vice-President Dick Cheney and other senior Administration officials to wear the same outfit to their next get-together with the President. Bush was amused.

It's that sort of independence of mind yet ability to get along well with others that should serve the 51-year-old Bernanke in good stead in his new position as head of the world's most powerful central bank. The challenges he faces are huge: an overinflated housing market that some analysts fear could burst at any time, a big and growing trade deficit that threatens to drag down the dollar, and mounting inflation fears on the back of sky-high energy prices.

Target shooting
In a sense, Bernanke has been training for the job for years. As a Princeton University professor, he delved deeply into the study of monetary policy and was considered one of the leading monetary economists of his generation. Then, as Federal Reserve governor for three years before joining the White House in June, he made a name for himself as a thoughtful analyst of the economy with an ability to explain arcane economic concepts in terms that people could understand.

Unlike the man he'll replace, Alan Greenspan, Bernanke believes the Fed should establish specific, numerical targets for inflation. He has argued that setting a 1 percent to 2 percent target would enhance the central bank's credibility as an inflation fighter, especially after Greenspan steps down on Jan. 31 of next year. And he pushed that argument -- gently, but consistently -- while at the Fed, despite Greenspan's position that such targets would hamper the bank's ability to respond to crises.

The financial markets won't wait long to test Bernanke's mettle as Fed chairman. Although stock markets bounded higher on Oct. 24, partly in relief that Bush had avoided nominating an unknown loyalist to the Fed job, the bond market and the foreign currency market were more skeptical. Bond prices and the dollar both dropped as investors fretted that, target or no, Bernanke would end up being less tough on inflation than his predecessor. Part of that skepticism was fed by Bernanke's record while at the central bank, where he was a leading proponent of keeping interest rates low to fight what turned out to be a nonexistent threat of a deflationary downturn in the economy.

Greenspan was on the job for only four months before he was confronted by the October, 1987, stock market crash, which saw share prices lose almost of a quarter of their value in a single day. The then-rookie Fed chairman handled the crises with aplomb, and the economy emerged virtually unscathed. Although Bernanke has yet to prove himself as a crisis fighter, his independence, collegiality, and analytical skills give him at least a fighting chance of success.

Copyright © 2012 Bloomberg L.P. All rights reserved.

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