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October 24, 2005
More on the Bernanke nomination
I tip my hat to David Altig for alerting us to this Bloomberg article. (While you're there, read Altig's post on core vs headline inflation!)
The new chairman ``needs to commit themselves very firmly to the Fed's commitment to price stability in deed as well as word,'' said J. Alfred Broaddus Jr., former president of the Richmond Federal Reserve Bank.
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Bernanke is an advocate of a strategy called inflation targeting where a central bank specifies a numerical goal for prices. The Federal Open Market Committee debated the strategy as early as February, and decided to defer the discussion.
Bernanke is unlikely to push the strategy unless he has unanimity, and Governors Roger Ferguson Jr. and Donald Kohn are opposed. Both may be willing to discuss a numerical description of what defines low inflation, and that could help solidify the Fed's inflation-fighting credibility with financial markets, households and businesses.
``Certainly, an inflation target that is explicit is one more step toward greater transparency,'' Broaddus said.
Since he was sworn in at the CEA on June 21, Bernanke has testified twice before Congress and given five speeches on non- controversial subjects. As a Fed chairman, his second test will be gaining credibility on Capitol Hill.
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The Fed is unusual among the world's central banks in that it has two mandates: stable prices as well as sustained growth that will result in low unemployment. Bernanke will have to at least express concern about jobs and growth in his nomination hearing, and, if confirmed, during his semi-annual testimony in February.
Delivering on the expansion will be tricky, however.
Economists expect U.S. growth to slow, even as inflation expectations rise in the aftermath of a 51 percent increase in retail gasoline prices this year. Fed officials have made it clear they intend to keep leaning against inflation by pushing up the federal funds rate, even after Hurricanes Katrina and Rita hurt third-quarter growth prospects.
St. Louis Fed Bank President William Poole even said that the Fed could err on the side of raising interest rates too high to clamp down on inflation because it could them cut them quickly if growth began to falter.
And in this post, Brad Setser lays out the problems with the "global savings glut" hypothesis as well as the parts he thinks Bernanke got right. In my comment on "Econoblog", I mentioned that this would be a subject for discussion.
Nouriel Roubini has some thoughts at his blog as well.
UPDATE: King at SCSU Scholars has a nice post which begins:
Should we make any big deal of the fact that the bond market sold off today, with Ben Bernanke replacing Alan Greenspan at the Fed? No, because looking at the inflation-indexed bond market shows that both indexed and non-indexed bonds fell by roughly the same amount. Were the concern about Bernanke that he would be softer on inflation, the non-indexed bond should have fallen more than the indexed bond. That link also includes a reminder that the bond market sold off when Alan Greenspan replaced Paul Volcker in 1987.
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Everyone wants things to stay as they are with monetary policy, and the market prices uncertainty by asking for a higher real yield. Thus today's bond market.
Go read the whole thing.
Posted by William Polley at October 24, 2005 04:36 PM
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