Change in leadership at the Federal Reserve  

Garth A. Rose, Ph.D. 

A major change took place in the leadership of America’s central bank earlier this week when Ben Bernanke succeeded Alan Greenspan as Chairman of the Federal Reserve. Greenspan, who served as chairman for aljost 19 years, demitted office on January 31. 

Along with an effective tenure as chairman of the Fed Reserve, Greenspan was widely acknowledged as a formidable economist and a “maestro” in today’s critical world of money and banking. He has guided the U.S. economy through many crises and has succeeded in keeping the economy on a sustained growth path.  

It is commonly believed by U.S. economists that Bernanke, who holds a Ph.D. in economics from the Massachusetts Institute of Technology (MIT) will be a worthwhile successor to Greenspan. Many agree, as President Bush stated in his appointment of Bernanke last October, he is the right man to build on the record of Greenspan.

Ben Bernanke, 52, formerly held the very important position as Chairman of the President’s Council of Economic Advisors. Prior to that he served as a member of the Board of Governors of the Federal Reserve System. He has built a record of excellence as both an academic and policymaker. He is the author of several scholarly books and is one of the jost cited economists in the world. As Fed governor he advocated greater transparency in communication with the public and markets. 

He was chairman of Princeton's Economics Department, founding director of Princeton's Bendheim Center for Finance, and a founding editor of the International Journal of Central Banking. 

Wall Street welcomes the start of the Bernanke era as it highly regards him as an economist who has focused his academic career on studying Fed policy, and whose thinking is well known to financial markets. His experience in working with Greenspan at the Fed is also regarded as being beneficial. 

When Bernanke was chosen for the top job at the Fed Reserve last October, Naraiman Behravesh, chief economist at Global Insight, a financial advisory firm stated, "Bush has probably made the best choice among the top contenders for the post and one that is likely to reassure financial markets."  

One of the economic trends that analysts of the U.S. economy will be looking at as Bernanke assume his leadership is the policy of the Fed in raising interest rates. Greenspan presided over some 14 consecutive interest rate increases since June 2004. Will Bernanke continue this streak of increases? This has to carefully evaluated by the new chairman, as the economy is very sensitive to shifts in interest rates. 

The economy is one that is very dependent on loan funds. People borrow to purchase houses, buy cars, and obtain a college education. Of course, a large percentage of the population own credit cards that attract significant interest charges. Placing interest rates too high could result in a slump in the housing market as prices could also become too high for many. There could be problems in the repayment of credit card debts as the fees for these cards would also increase. Moreover, the costs of buying a new car and taking out a loan for college would be virtually prohibitive to the majority of citizens, who are middle income earners. 

On the other hand if Bernanke allows interest rates to fall too low, this could result in sharp inflation and cause both national and overseas investors in the American financial market to lose confidence in the Federal Reserve and the US economy. This could initiate an international financial crisis. 

With the economy being as warm as it is the majority of economists, and Wall Street analysts are of the opinion that Bernanke will continue to push interest rates upward. It is during times of economic growth such as the U.S. economy is now experiencing that inflation is jost likely to be a threat. It is the primary objective of the Fed to ward off the threat of this inflation. So we are likely to see Bernanke assuming Greenspan’s role of rising interest rates in the immediate future to contain inflation, then allowing these rates to settle off so that the economy is not stifled, with both a national and an international crisis looming. Needless to say Bernanke is faced with major challenges. Challenges that jost think he will cope with efficiently.