ByJustin P. Hauke , Edward Nelson
When Ben Bernanke was sworn in as Chairman of the Federal Reserve on Feb. 6, 2006, he inherited a low inflation economy of unmatched stability. After nearly two decades of Alan Greenspan as chairman, the appointment of a successor was a major watershed-signifying the end of a very successful, if sometimes opaque, period of monetary policy.
Prior to Bernanke's appointment, several analysts expressed concern about preserving continuity with the "Greenspan Fed." Under Greenspan, monetary policy had become perceived as amounting to a one-man show, focused primarily on the chairman's judgment and high reputation. Some economists, while acknowledging Greenspan's success, stressed the need for more depersonalized monetary policy, with one arguing, "It is reasonable to be concerned about the extent to which favorable monetary policy has arisen because of the idiosyncratic traits of particular central bankers."
Once Bernanke's nomination was announced, observers looked for differences in his perspective from Greenspan's. It had frequently been noted that, while Greenspan defined the optimal rate of inflation as "zero, if inflation is properly measured," he had been less specific about how actual, measured inflation should behave.
Bernanke, by contrast, expressed his preferred level of inflation as around 2 percent in the measured rate. In addition, while Greenspan preferred a relatively unstructured approach to monetary policy that maximized his own room to move, Bernanke was on record as favoring an announced "inflation objective," which would help inform the public about the Fed's future policy actions.
The past year's record suggests that fears surrounding post-Greenspan economic prospects have not been realized. Throughout 2006, Chairman Bernanke and the Federal Open Market Committee have carried out monetary policy in a manner consistent with the aims Bernanke expressed in his 2005 confirmation hearings. In those hearings, Bernanke had said he would make "continuity with the policies and policy strategies of the Greenspan Fed a top priority." In addition, Bernanke has emphasized his agreement with Greenspan that low and stable inflation is necessary for sustained economic growth.
Chairman Bernanke has also stressed the importance of structural changes in the real economy, particularly in the area of labor productivity. Over the past decade, productivity growth increased nearly twice as fast on average as it did from the early 1970s until 1995. This shift has allowed the economy to absorb greater growth rates of aggregate demand without generating inflationary pressure.
The economic results of the Bernanke regime must be interpreted tentatively, both because little more than a year's worth of data is available and because it takes time for monetary policy actions to affect the economy. But outcomes so far are encouraging. Inflation has generally been low, aside from energy-driven spikes that did not spill over into higher inflation expectations. In addition, the economy has grown at a healthy pace.
These outcomes suggest that the new leadership at the Fed has been successful in preserving continuity with the Greenspan era.