The position of Federal Reserve Chair has been described as the nation's second most powerful job. So when the 79-year-old Fed Chair Alan Greenspan retires after an 18-year tenure in January, there will be no lack of anticipation and scrutiny in store for chair nominee Ben Bernanke.
President Bush nominated Bernanke Oct. 24 to succeed Greenspan. Bernanke, 51, the head of Bush's Council of Economic Advisors and is also a former fed governor and Princeton University economics professor. Bernanke was a favorite for the position, and has promised 'to maintain continuity with the policies and policy strategies established during the Greenspan years.'
These policies may become invaluable roadmaps for the potentially bumpy economic path the country appears to be moving toward.
'Housing prices on the East and West Coasts have risen too high because of speculation. If there is a housing bubble and it pops and housing prices drop quickly the Fed will have a hard time getting monetary policy exactly right,' said Charles Engel, UW-Madison professor of finance and economics.
'Mr. Greenspan is leaving several major problems that Bernanke and the FOMC will need to address,' said Donald Hester, UW-Madison professor emeritus of economics. 'Inflationary pressures are likely to continue as the consequences of high energy prices and a devaluating dollar shift into the consumer price index. At present, the economy seems likely to expand in 2006, but that could change if debt-ridden consumers cut back on their spending.'
Financial markets and consumers alike would prefer stability and consistency. Bernanke, who will likely follow most of the practices set in place by Greenspan, has nevertheless stated that he is in favor of having an explicit interest rate target rather than the more flexible estimated interest rate target preferred by Greenspan. Interest rates are used to control inflation. If inflation is not managed properly it can be disastrous for a country's economy.
The Federal Reserve plays a crucial role in managing the economy. It regulates banks, decides policy on interest rates to help control inflation, and helps manage financial crises such as depressions, bubbles and unexpected events. Since the United States is such large contributor to the global economy, the decisions of the 'Fed,' as it is commonly called, can have worldwide economic repercussions.
