While his economic views largely followed the Greenspan model, those clear, concise, and polite-but-firm answers announced the Fed's new era
Ben Bernanke slipped into the House Financial Service Committee's hearing room from behind the dais. He quietly made the rounds, chatting briefly with several lawmakers. Then he took the central seat at the long witness table, and it was clear: For the first time in 18 years, someone other than Alan Greenspan was going to convey the Federal Reserve's viewpoint on the U.S. and global economies to Congress.
In his first public performance as Fed chairman, Bernanke hit all his marks and achieved modest goals. He didn't say anything that would upset the markets, and he delivered the Fed's message as well as -- or even better than -- Greenspan. Comparison between Bernanke and the long-time maestro of monetary policy are inevitable. But the new Fed chief used the three-hour hearing to start carving out a style of his own (see BW Online, 2/16/06, "Bernanke's Washington Honeymoon").
Bernanke was careful to reassure lawmakers that he would follow Greenspan's winning formula -- a combination of sophisticated economic forecasting with real-world empirical observation. But the new Fed boss strayed from the former chairman's playbook in a few ways and put his own imprint on the current economic landscape in others. The appearance gave a preview of some likely hallmarks of his tenure, including:
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Even before his House testimony, Bernanke had vowed to steer clear of issues outside of the Fed's banking-and-interest rate turf. As a Fed member, Bernanke had seen the controversy that often followed Greenspan's musings, especially on tax policy.
The new Fed chief also must establish his independence as a central banker and distance himself from his previous partisan job as chairman of the White House Council of Economic Advisers. So Bernanke repeatedly turned down requests to opine on President Bush's campaign to make his tax cuts permanent -- calling such decisions "Congress' prerogative."
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But Bernanke slipped on occasion in his vow to stay strictly in Fed Land. He spoke often of the need for an educated, globally-competitive U.S. workforce. And once he stressed his preference for school vouchers, or as he put it, "funding the student, not the school." By "giving individuals the choice of where they want to go, you utilize the market and choice to create competition among schools," he said.
In another slip, Bernanke indicated a distaste for raising the minimum wage. A higher floor might offer a lift for those lucky enough to have minimum-wage jobs, but would be likely to mean fewer people have jobs, Bernanke said. "Minimum wages affects a very small [percentage] of workers," he said.
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On that and other questions, Bernanke's Democratic inquisitors didn't enjoy hearing his conservative analysis. But they were pleased at his style, as the new Fed chief crafted well-balanced, politic answers. He was always careful to acknowledge the Democrats' concerns. In contrast, Greenspan could adopt a dismissive tone for interlocutors who didn't share his conservative philosophy.
In one of many exchanges on growing income inequality, for example, Bernanke said: "I agree that rising inequality is a concern. The strength of the economy itself requires a belief of the broad American public that they are beneficiaries of a rising economy." But then he ascribed much of the inequality to a "rising skill premium" and the need for workers to gain more education to capture higher wages.
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While Bernanke acknowledged the risks in America's ballooning trade deficit and the current housing bubble, he reserved his biggest concern for the uncertain outlook for energy prices.
"We're in a difficult period, operating close to the margin of the available supply of oil and gas," he noted. Current high prices might induce conservation and alternative sources of energy in 10 years to 15 years, he said. But "over the next 5 to 10 years, we're in a zone of vulnerability without alternatives and a relatively small margin of error in terms of global supplies."
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Bernanke introduced a note of hawkishness into the proceedings, warning that inflation this year is likely to run at the high end of the Fed's forecast range, though "longer-term inflation expectations appear to have been contained." While noting that inflation pressures increased last year, the Fed's favored measure of core personal consumption expenditure (PCE) prices "at just below 2% remained moderate."
Yet risks to the bullish outlook are from rising energy prices, a slowdown in the housing market, the rising deficit, and some structural weakness in several areas of the economy and the auto and aircraft industries.
Accordingly, the Fed's central tendency forecasts -- its projections for economic growth and inflation issued in conjunction with the Fed chief's appearance -- showed real (adjusted for inflation) GDP "about 3½%" for this year, and a 3% to 3½% range for 2007. The core PCE price index is seen "about 2%" this year, and 1-3/4% to 2% next year. The unemployment rate is seen at 4-3/4% to 5% this year and in 2007.
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We at Action Economics suspect the Fed's growth forecasts may be low-balled relative to our own quarterly forecasts. Nevertheless, the Fed's estimates suggest that with growth steady, inflation peaking, and unemployment low, another one or two quarter-point rate hikes may be in the cards. Indeed, financial markets appear to be pricing in such a scenario.
Bernanke delved into a recap of the yield curve "conundrum," in which policy tightenings have failed to bring about an increase in long-term yields, and he suggested that the inverted curve (in which short-term rates rise above long-term rates) does not necessarily indicate a recession is on the horizon. He mentioned the usual arguments of lower risk premiums given Fed policy credibility, rising global savings, and demand for long-term securities from entities like pensions and life insurers.
On another hot-button subject, Bernanke noted "a number of indicators point to a slowing in the housing market," though some cooling in the sector was not inconsistent with continued solid growth in the economy overall. The housing trends bore watching along with risks from higher energy prices, which could also dent consumer confidence because of higher gas and heating oil bills. Moreover, Bernanke saw historically low mortgage rates and rising household wealth as supportive of the sector, with a decline in personal savings a temporary factor.
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He expected oil prices to remain high for now, given global supplies being close to capacity. Echoing his predecessor, he said that high prices would help encourage alternative energy sources 10-20 years down the road, though we will have to live in a "zone of vulnerability" for the next 5 years to 10 years.
On the current account deficit, he noted that it was a concern as imbalances grow, but expected that in the longer-term these should be self-correcting and will decline over time. That said, he noted that it would be undesirable for a rapid adjustment in the deficit, which could be disruptive to the economy, though he did not see that as a likely event.
He also recognized that global growth appeared to be strengthening, with Canada and Mexico expanding solidly and "especially significant" that Japan appeared to be emerging from its slump and its bout with deflation.
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Bernanke clarified the Fed's views on wage growth, suggesting that the Fed was concerned about the increase in wages above the rate of inflation, though rises in "real wages" were healthy. Otherwise, he agreed that it was important to avoid income inequalities. The Fed did notice that education levels largely determined future earning power and therefore education should be emphasized to reduce this gap.
Overall, we think he did a commendable job of avoiding the pitfalls of politicizing these issues in response to some rather pointed questions. He also favored a research and development tax credit, given the importance of R&D on future economic growth.
Turning to another key topic, Bernanke noted that energy-price increases have not translated into a outsized jump in inflation, wages and prices, suggesting that the economy is less dependent on energy than previously.
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Bernanke saw the eurozone recovering, Asia growing strongly, and China booming. The trade deficit was growing partly due to the high dollar cost of energy prices and imports, while the past strength of the dollar helped contain inflation.
The Fed chief also paid tribute to Greenspan and hinted at continuity at the Fed by referencing the former chair's "risk management" approach to policymaking. He noted the limits of macroeconomic models which did not take fully into account the full breadth of economic and financial data.
In this regard, "monetary policymakers must therefore strike a difficult balance -- conducting rigorous analysis informed by sound economic theory and empirical methods while keeping an open mind about the many factors, including myriad global influences, at play in a dynamic modern economy like that of the U.S."
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The rookie Fed chief also addressed the issue of transparency at the central bank. Bernanke hopes to be more open about Fed strategies and how it sees the economy. He suggested that "fresh air is good," noting that more openness will add to accountability of policy and that it will add to credibility of policy and make it more effective.
Bernanke wants to continue in that direction, with possible moves including a long term inflation target. So while the Bernanke Fed's monetary policy is expected to hew close to that of his predecessor, he may just put his own stamp on the central bank in other ways.
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While acknowledging a slowing housing market and pricy oil, an upbeat Fed chief faced few tough questions during his maiden trip to the Hill.
Call it a solid rookie performance. Newly minted Federal Reserve Chairman Ben Bernanke provided a refreshingly lucid -- and mostly as-expected -- monetary policy report in his first semiannual testimony before the House Financial Services Committee on Feb. 15. (Bernanke will appear before a Senate panel on Feb. 16.)
The Fed chief and the House panel members who quizzed him after he read his prepared testimony were mutually respectful for the most part, though a number of House members could not resist an attempt to politicize the testimony. Bernanke made sure to tread very carefully while offering well-considered answers to pointed questions on wage inequality, housing, trade with China, the yield curve "conundrum," the current account gap, tax policy, etc.
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While acknowledging a slowing housing market and pricy oil, an upbeat Fed chief faced few tough questions during his maiden trip to the Hill.
Call it a solid rookie performance. Newly minted Federal Reserve Chairman Ben Bernanke provided a refreshingly lucid -- and mostly as-expected -- monetary policy report in his first semiannual testimony before the House Financial Services Committee on Feb. 15. (Bernanke will appear before a Senate panel on Feb. 16.)
The Fed chief and the House panel members who quizzed him after he read his prepared testimony were mutually respectful for the most part, though a number of House members could not resist an attempt to politicize the testimony. Bernanke made sure to tread very carefully while offering well-considered answers to pointed questions on wage inequality, housing, trade with China, the yield curve "conundrum," the current account gap, tax policy, etc.
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