Financial Times Editorial - Bernanke's baptism

Bernanke's baptism
Published: February 16 2006 02:00 | Last updated: February 16 2006 02:00. Copyright by the Financial Times

Ben Bernanke's first testimony to Congress as chairman of the Federal Reserve marks the real beginning of the post-Greenspan era at the Fed. At this stage the change is more obviously one of style than substance. While Mr Bernanke's language was more straight-forward than that of Alan Greenspan, the message was one of continuity. Yet there was the odd hint that larger changes may come in time.

The new Fed chairman was at pains to stress that he agreed with the policy stance inherited from his predecessor. He carefully echoed the economic analysis made by the Fed's open market committee on January 31, just before his appointment took effect.

Mr Bernanke also expressed himself comfortable with the average of the economic forecasts made individually by members of the FOMC, published in the report to Congress. In an apparent bid to dispel fears that he will be overly academic in his analysis, he promised to follow the "standard operating procedure" of the Greenspan Fed.

However, this testimony represents a departure point rather than a final destination for the Bernanke Fed. Mr Bernanke was constrained by the task in hand: setting out the Fed's collective position at the time of handover. There were just a few glimpses of where his own instincts might lead it in future.

His testimony was mildly hawkish on growth. Those in the bond market who still harbour suspicions of "helicopter Ben" for suggesting in 2003 that the Fed could stop deflation by dropping dollar bills from a helicopter, will be reassured by his warning that the danger of over-heating might warrant further rate rises. Mr Bernanke emphasised that there was "considerable momentum" in demand. He was relatively sanguine about the housing market and left open the possibility that interest rates were still accommodative at 4.5 per cent. However, set against this, he was also relaxed about the current level of inflation.

The new chairman avoided any mention of inflation targeting in his statement. Yet his explanation as to why it was correct for the Fed to focus on inflation as a means to achieving its broader mandate implied that an inflation target would be constitutional.

Successive forecasts by FOMC members suggest an implied target of between 1.5 per cent and 2 per cent on the core personal consumption expenditure measure. Mr Bernanke said he was "comfortable" with these numbers as projections. He also described core PCE inflation in 2005, at 1.9 per cent, as "moderate". This sits oddly with the notion that the Fed has a comfort zone of 1 to 2 per cent on the same measure.

At some point Mr Bernanke will have to clarify to the markets what the Fed is aiming for. For now, however, his task is to avoid any abrupt discontinuities and shepherd the FOMC towards consensus on when to end the rate tightening cycle. The lack of drama in yesterday's testimony was a good start.