With the threat of inflation returning, keeping it tame would be the first job of Ben Bernanke, whom President Bush on Monday appointed to be chairman of the Federal Reserve Board. On Oct. 14, the U.S. Labor Department reported that consumer prices rose 1.2 percent in September, the highest level since March 1980, during the era of Jimmy Carter’s “stagflation.”
Bernanke certainly has the economic credentials. Schooled at Harvard and MIT, from August 2002 to June 2005 he served on the board. Since June, he has served as the chairman of the president’s Council of Economic Advisers. If confirmed, he would succeed Alan Greenspan, who has served as Fed chairman for 18 years and is leaving Jan. 31.
Bernanke is “a good choice,” said Esmael Adibi, director of the Center for Economic Research at Chapman University. “He has worked with Greenspan. He probably would approach monetary policy like Greenspan.” One difference is that Bernanke has “a greater emphasis on transparency” in the board’s actions. We hope that means Bernanke avoids Greenspan’s famously obscure statements.
Another difference, Adibi said, is that Bernanke “wants to set inflation targets,” whereas Greenspan “doesn’t want inflation targets.”
Some insight into Bernanke’s economic philosophy comes from a speech he gave on Nov. 21, 2002, before the National Economists Club in Washington, D.C., when he was a Federal Reserve Board member. At the time the concern was deflation — prices falling. “The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation,” he said.
He pointed out that the board usually combats inflation or deflation through interest rates. Indeed, it lately has been boosting interest rates to combat inflation. On Sept. 20, 2005, the board made its 11th consecutive increase in the federal funds rate, the rate banks use with one another, to 3.75 percent.
But Bernanke added, back in 2002, that to deal with deflation, the board also can use “injecting money into the system,” by printing more money. We would comment that the obverse, printing less money, would be a way to deal with the inflation of 2005. Doing so would be a way to fight inflation without increasing interest rates even more.
We’ll have to wait a few months to see how Bernanke’s board performs, assuming he is confirmed. A positive sign Monday was a sharp, 170-point rise in the Dow Jones industrial average.