Bernanke makes the grade in his first year
Published: Wednesday, January 31, 2007 at 6:01 a.m.
Last Modified: Wednesday, January 31, 2007 at 12:00 a.m.
WASHINGTON — The economy tested Federal Reserve Chairman Ben Bernanke during his first year on the job. A sinking housing market and a troubled auto industry threatened to short-circuit economic activity. Gyrating energy prices threatened as well.
By most accounts, the Fed chairman passed.
"I think he has done a pretty masterful job playing with the hand he has been dealt," says Terry Connelly, dean of Golden Gate University's Ageno School of Business.
Inflation calmed down along with once-raging energy prices. The jobs market is sturdy, the nation's unemployment rate last year fell to a six-year low of 4.6 percent. And economic growth in 2006 is estimated at just over 3 percent, a solid performance.
Bernanke and his colleagues gather Tuesday for a two-day meeting to discuss what is needed to keep the economy on track and improve the central bank's communications with Wall Street and Main Street.
They were widely expected to hold an important interest rate steady at 5.25 percent. If so, commercial banks' prime interest rate for certain credit cards, home equity lines of credit and other loans would stay at 8.25 percent.
Since August, the Fed's key interest rate hasn't budged, giving borrowers a break. Before that, the Fed had steadily boosted rates to fend off inflation.
Economists give Bernanke, who took the helm last February, high marks for his handling of the economy thus far. They believe he has recovered from communications blunders early in his chairmanship that sent stocks on Wall Street into a nosedive and cast doubt on his credibility.
"Mr. Bernanke's C+/B- performance in the early months of his chairmanship has become a B+/A- performance in the past few months," observed Nariman Behravesh, chief economist at Global Insight.
Still, even when Bernanke's message was clear and consistent — notably his mostly upbeat assessment last year about the economy's growth prospects — many on Wall Street had taken a decidedly dimmer view.
A respected economist who spent most of his professional life in academia, Bernanke never worked on Wall Street. Skilled communications are critical because a single utterance by a Fed chief can affect the financial fortunes of millions of investors.
Bernanke speaks clearly and plainly, a sharp contrast to his often deliberately cryptic predecessor, Alan Greenspan, who ran the Fed for 18 years, and was owlishly inscrutable peering out from black horn-rimmed glasses.
The new Fed chief, whose beard and less buttoned up demeanor bring to mind the rumpled professor he once was, is trying to create a more democratic central bank by gently shifting the spotlight of monetary policymaking to the institution rather than its chairman.
The change in style from the bespectacled one to the bearded one may take some getting used to, investors and economists said.
"Bernanke is more of a teacher than a preacher," said Diane Swonk, chief economist at Mesirow Financial. "He is more a behind-the-scenes guy. He speaks more plain English, using football analogies and things like that. But the jury is out on whether that is the right way to go or not."
Inside the Fed, Bernanke is well liked. "People feel like they have more of a say in policy decisions. There is a sense within the Fed there is more contribution, less of the benevolent dictatorship," Swonk said.
At four of the Fed's interest rates meetings last year, Bernanke was faced with one dissenter: Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va. Lacker had wanted to boost rates, while the rest of his colleagues voted to leave them alone.
Deciding when to take a breather from the central bank's two-year string of rate increases, the longest stretch in Fed history, was arguably Bernanke's biggest challenge.
Bernanke is not one to seal himself in his stately Fed office. Sometimes, he'll eat lunch in the Fed's cafeteria, mingling with staff. He also can be spotted on occasion playing basketball with staff or shooting hoops with whomever is around on the half-court in the Fed's basement.
On Capitol Hill, an unflappable Bernanke has been able to hold his own, when Republicans were in charge and now with the Democrats in power for the first time in a dozen years. As Fed chief, Bernanke, who was tapped by President Bush, has avoided taking political sides despite efforts by Republican and Democratic lawmakers to persuade him to do so.
Greenspan played the political game differently.
His blessing of Bush's first tax cut in 2001 gave an important boost to the president's ultimately successful efforts to get Congress to enact the tax cut. Greenspan's strong support for President Clinton's first-term economic program, which included a mix of spending cuts and tax increases to shrink the budget deficit, also was critical. Sometimes he caught flak for weighing in on politically sensitive debates.
Thus far, Bernanke's leadership hasn't been tested by a major financial crises.
In contrast, Greenspan, after just two months on the job, was confronted with his first major emergency: The stock market dropped 508 points on Oct. 19, 1987. The biggest one-day loss since the Great Depression sent shock waves through financial markets worldwide.
T.J. Marta, fixed income strategist at RBC Capital Markets, says Bernanke has done a "pretty bang-on job" but needs to toughen up his public persona.
"Voice control would be very important ... his voice goes shaky. Rightly or wrongly, the markets aren't intellectual, they are more emotional. If they sense a lack of leadership, they will tear into it," he says. "No one doubts the guy has brain power."
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