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Santomero says Fed succession to be smooth

The transition to a new Federal Reserve chairman will be a smooth one, Federal Reserve Bank of Philadelphia President Anthony Santomero said Monday.
/ Source: Reuters

The transition to a new Federal Reserve chairman will be a smooth one, Federal Reserve Bank of Philadelphia President Anthony Santomero said last week.

"I am confident that the passing of the torch from Chairman (Alan) Greenspan to his successor will be smooth and seamless," Santomero said in a lecture to the North Carolina State College of Management on how the Federal Open Market Committee (FOMC) works.

"For one thing, while processes may change, the Fed's mission will not. Our dual mandate of fostering full employment and a stable price environment remains firmly in place," he said.

Greenspan retires at the end of January 2006.

Santomero has been a keen proponent of adopting an inflation target to help anchor monetary policy, a policy tool not favored by Greenspan. But he would not speculate on whether the FOMC would adopt such a policy under a new chairman.

"Whether we get to an explicit statement is still a question for the committee," Santomero said in response to a question. "Our challenge first is to make sure that markets understand that we will do what is necessary to maintain price stability, and one of the ways to do that is to take the extra step" toward targeting.

A Reuters poll of primary dealers has predicted that Ben Bernanke, the chairman of President George Bush's Council of Economic Advisors and a proponent of targeting, would be Bush's most likely choice to replace Greenspan.

Housing froth to dissipate
Santomero did not discuss current economic conditions or monetary policy in his lecture, but he later said in response to questions that higher interest rates were likely to take some of the steam out of the U.S. housing market, which did show signs of "froth" in some areas, he said.

"Based on previous history, as interest rates move up, we see a dampening in the demand for housing and the acceleration of demand slows," Santomero said.

On energy prices, he noted that the U.S. economy had been able to withstand higher prices because it had grown more energy efficient in recent decades.

"We have to continue that conservation. We must recognize that we are in a developing world," he said, adding that futures markets show that "oil is not going back to $30 barrel anytime soon."

U.S. crude oil prices jumped nearly 3 percent Monday to close at $64.30 per barrel.

Santomero also said capital was likely to continue to flow into the United States as long as the economy remained vibrant, noting that funds have flowed into U.S. markets during both good and not-so-good economic times.

"Our job as policy-makers is to try to maintain that vibrancy to allow that to take place, to allow us to be the market of choice internationally," he said.

In his speech, Santomero said there were challenges to deciding policy, including the difficulty in precisely measuring economic conditions and the lag times inherent in monetary policy. Amid these uncertainties, it was best to gear policy toward "long-term growth objectives."

Another challenge was dealing with public expectations of the economy's path, as changes in sentiment affected consumers' spending decisions and, consequently, the growth in aggregate demand.

The Fed cannot, and should not, try to manage public expectations, he said. "However, it can help stabilize them by being as transparent as possible in its own decision-making," he added.