Four months into the job and the honeymoon is over for Federal Reserve Chairman Ben Bernanke. The stock market is gyrating. Inflation is picking up. Economic growth is slowing down. It's an unsettling picture for Alan Greenspan's successor.
Bernanke has made clear that his biggest concern at the moment is making sure inflation does not spread through the economy. The main remedy is raising interest rates.
Yet that also is Bernanke's dilemma: How high can raise rates go before they slow an economy that already is showing signs of lethargy?
"In the eyes of many, Bernanke will truly earn his stripes as Greenspan's successor if he can tame inflation and avoid a recession," said Greg McBride, senior financial analyst at Bankrate.com.
When Bernanke took over the Fed on Feb. 1, the economy was motoring ahead. Inflation, outside a burst in energy prices, was fairly well behaved. The Dow Jones industrials average was drifting upward, breaking the 11,000-mark in the middle of February; by early May, an all-time high was in reach.
Then the market skidded in early June, spooked by Bernanke's tough talk on inflation and the specter of higher interest rates.
Bernanke is a respected economist who spent most of his professional life in academia. Greenspan was a seasoned economic consultant who gained near legendary status as the central bank's chairman for 18 1/2 years and evolved into a cultural figure during his tenure.
Greenspan and his predecessor, Paul Volcker, also faced daunting challenges early on in their jobs at the Fed.
"It seems to be the modus operandi for a new Fed chief. As soon as the new Fed chairman sits down in his chair, then the markets deal him a whole bunch of crazy things," said Richard Yamarone, economist at Argus Research.
After just two months at the helm, Greenspan confronted his first major crisis: The stock market dropped 508 points on Oct. 19, 1987. The biggest one-day loss since the Great Depression shocked financial markets at home and abroad.
Greenspan nimbly handled "Black Monday." He quickly reassured Wall Street that the Fed would supply all the credit necessary to keep the nation's financial system functioning.
For investors, Greenspan's calming public response helped bolster the markets' faith in the new chairman and ease fears he would be a political hack because of his close ties to Washington's establishment.
Behind closed doors, Greenspan was more frank.
"I think we're playing it on a day-to-day basis. And in a crisis environment," he said in an emergency conference call with his Fed colleagues one day after the crash. "I suspect we shouldn't really focus on longer-term policy questions until we get beyond this immediate period of chaos."
When Volcker took office in August 1979, he had to contend with crippling inflation in the double digits. For all of 1979, consumer prices spiked by 13.3 percent. The economy, meanwhile, was losing steam.
It was eight days into his tenure that Volcker fretted to bank colleagues at a private meeting about the "crisis of credibility" the Fed faced with investors and the public.
He also worried that people would fear that inflation would only get worse. "We can't ignore the psychological problem that we have at the moment," Volcker said. The Fed, he said, needed to earn the confidence of investors and the public. "We haven't got a helluva lot of time," Volcker warned, worried about the economy slipping into recession.
Volcker is credited with eventually breaking the back of inflation by raising interest rates to levels unseen since the Civil War. But the strategy came with a price: two recessions in the early 1980s and the nation's monthly unemployment rate topped 10 percent.
Stung by economic malaise, President Jimmy Carter lost his re-election bid to Republican Ronald Reagan.
Both Volcker and Greenspan, who saw inflation creeping up when he came to office, understood the importance of getting inflation under control.
Bernanke does, too.
In a surprisingly candid speech on June 5, Bernanke made clear that he would do all he could to tame inflation. Fed watchers say Bernanke's tough words were intended to bolster his inflation-fighting image.
Rising inflation barometers, Bernanke said, "are unwelcome developments."
Consumer prices for the first five months of this year are bounding ahead at a 5.2 percent annual rate, compared with the 3.4 percent increase for all of 2005.
Prices — excluding food and energy — are advancing at a 3.1 percent pace this year; it was 2.2 percent last year.
For Bernanke and his predecessors, it is not just the inflation numbers that are so crucial. So, too, is the inflation mind-set of investors, businesses and consumers. If they believe prices will keep climbing in the future, it can affect behavior.
For instance, if workers think inflation will be higher a year from now, they are more likely to push for pay raises now. If businesses think costs will rise in the future, they may be more inclined to increase prices.
"The best way to prevent increases in energy and commodity prices from leading to persistently higher rates of inflation is by anchoring the public's long-term inflation expectations," Bernanke said June 5. "Achieving this requires, first a strong commitment of policymakers to maintaining price stability ... and second a consistent pattern of policy responses to emerging developments as needed to accomplish that objective."
That means another bump in interest rates at the Fed's next meeting, June 28-29, to 5.25 percent, economists predict. Further increases could be in store depending on how inflation and economic activity unfolds.
President Bush, coping with low job-approval ratings, expressed confidence in Bernanke.
"Obviously, the Fed is watching the signals for inflation very carefully," he said.