George W. Bush's nomination of Ben Bernanke as Federal Reserve Chairman is one of the wisest moves of his presidency.
Though the nation's first president with an MBA has recently shown a knack for bungling legal appointments, he has provided exactly what financial markets from Wall Street to Hong Kong need: stability. In an uncertain time of war, rising oil prices and a continually inflating housing bubble, markets need to ground their expectations somewhere.
Alan Greenspan has been that rock for the last 18 years. He turned the stock market's biggest one day drop into a small blip in one of history's most phenomenal bull markets. His oracular statements have been the symbol of an increasingly transparent Federal Reserve System.
Greenspan is considered by many to be sole decision-maker at the Fed, expertly navigating the economic climate. Eventually, the sage needs to be replaced, both smoothly and conscientiously. In the interest of a calm transition, a non-volatile candidate is necessary.
Bernanke has played an important role in this gradual evolution of the world's most influential central bank. He was one of the supporters behind the Fed's recent decision to provide medium term inflation forecasts.
The critical issue facing a central bank is to maintain credibility in monetary policy through transparency and independence. Bernanke has indicated he will maintain the collegial atmosphere of the Fed - an important step in distancing the Board of Governors from politics.
Markets were at risk of significant volatility following the nomination of Greenspan's successor, but despite a tense climate of rising interest rates and low consumer confidence, the transition passed smoothly. This is clearly a positive sign. The markets are comfortable with the idea of a Bernanke tenure. He has proven himself openly and consistently over the years. His voluminous writings and numerous speeches over the years have made his views clear. There is little risk of another Harriet Miers appearing before Congress.
Bernanke's support of inflation-targeting is seen as controversial and misdirected by many. It is important to remember that this is simply another step in the Fed's attempt to open itself to investors. Traders and investors alike will benefit from knowledge of the Fed's inflation goals. In increasingly global markets, it is no longer just Americans but financial markets everywhere that depend on U.S. policy.
The danger is that by restraining himself to an inflation-oriented policy, Bernanke risks veering away from Congress' dual mandate of maintaining full employment and price stability. Financial markets have become increasingly volatile in their globalization. We no longer live in a situation where monetary policy can be expressed as a simple set of rules, models or targets.
Bernanake's track record of consistency is an important element for a successful chairmanship, but in order to be as great as his predecessor, he must also be prepared to respond dynamically to evolving global markets. Continued Fed success in dealing with external shocks will be crucial to a successful Bernanke chairmanship.
