Bernanke's Refreshing Pause

Ben S. Bernanke, the rookie aviator flying the central bank’s monetary airplane through uncertain economic weather, last week survived his first major test with a soft landing. With Washington in a rancid mood this summer, the new chairman of the Federal Reserve Board has received little credit for a successful maiden flight that is very good news for the economy.

Bernanke’s decision to pause on Aug. 8 and not increase interest rates for the first time in 18 meetings of the Federal Open Market Committee drew widespread complaints that he was a slacker in the war against inflation. But contrary to the expectations of these naysayers, core inflation figures released by the Labor Department Aug. 15 matched its biggest drop in three years. The markets, far more important than opinions of the economic savants, gave Bernanke a vote of confidence. A boost in bond prices reflected no fear of inflation.

Market approval of Bernanke’s performance constitutes early success in achieving a most daunting task for any central banker: to slow a rapidly growing economy enough to control inflation without crashing and burning in a recession — that is, a soft landing. Bernanke’s legendary predecessor, Alan Greenspan, crashed twice in three attempted landings during his long tenure at the Fed. This early success constitutes a rare victory for President Bush, whose selection of Bernanke to replace Greenspan Feb. 1 did not win plaudits from the financial community or many conservatives.

Actually, no Fed chairman has been better qualified to run the Fed than Bernanke, who as chairman of Princeton’s economics department was a leading student of monetary policy. He served for three years as a Fed governor before heading Bush’s Council of Economic Advisers (CEA) for seven months prior to returning to the central bank. But he was not favored as Greenspan’s successor by the Fed bureaucracy, conservative Fed-watchers or Wall Street speculators.

The popular choice to head the Fed was a familiar face in big-time economics: Martin Feldstein, a 66-year-old Harvard professor. As President Ronald Reagan’s CEA chairman 23 years ago, Dr. Feldstein was the bete noire of supply-siders who designated him as "Dr. Gloom" for publicly demanding higher taxes and higher interest rates.

Oddly, Feldstein has become a favorite of latter-day supply-siders, though he still evokes the image of Dr. Gloom by advocating anti-inflationary interest rate increases no matter what the cost. "It is understandable that it [the Fed] would like to achieve the soft landing of low inflation with continued solid growth," Feldstein wrote in The Wall Street Journal on Aug. 7, the day before Bernanke’s pause. "But that may not be possible. And if the Fed wants to convince the markets that inflation will be contained in the future, it must show that it is willing to take the risk of tightening too much."

Following Feldstein’s line, critics took Bernanke to task for not daring to tighten too much. They would have been in full cry had the Aug. 15 inflation numbers been high and the market reaction negative. However, the opposite results last week evoked no cheers for Bernanke.

It may be too difficult for idolaters of Greenspan as "the maestro" to credit Bernanke’s early success. If an unheralded economics professor can so quickly replace the legend, is it possible that Greenspan’s legendary status was mostly hype? Hardly anybody wants to acknowledge that Greenspan helped produce a bubble economy by bringing interest rates down to 1 percent and then overshooting the mark in raising them.

But there are dollars-and-cents reasons for Bernanke’s unpopularity among financial sharks. High-ticket, speculative investors count on serious opportunities in a central bank creating a turbulent atmosphere where short-sellers can prosper. They are not refreshed by the Fed’s pause.

While George W. Bush keeps hands off Fed policy, he and his economic team are delighted by Ben Bernanke not following Marty Feldstein’s formula of daring to tighten too much. Europe’s economy is lagging today and faces a regimen of higher taxes and higher interest rates that will suppress growth. If American tax cuts and a pause in higher interest rates do not generate inflation, prophets of gloom will be proved wrong.