Changing of the Guard at the Federal Reserve Bank

With Alan Greenspan preparing to step down after 18 years at the head of the Federal Reserve Bank, Bush has nominated Benjamin Bernanke to replace him. While Bernanke has announced his intention to follow many of the examples Greenspan set during his tenure, he figures to diverge from Greenspan on at least one critical point.

"Where he differs from Greenspan is that Bernanke is more in favor of explicitly putting a rule on monetary policy," says Victor Zarnowitz, a fellow committee member and a retired University of Chicago economist now based at the Conference Board in Manhattan who's been forecasting recessions since Eisenhower was president. Greenspan, on the other hand, "would rely on judgment which in Greenspan's case depends so much on the judgment of a single man."

These rules, particularly inflation targeting--an approach used by many European central banks--would suggest directly how and when the Fed might spring into action to damp down inflation, and could provide greater confidence for stock, bonds, currency and commodity markets as to just what direction interests are headed.

"I assume that will happen now," Benjamin Friedman, who serves at the Conference Board and chaired Harvard's economics department while Bernanke was leading the Princeton department. "We will be replacing Alan Greenspan, who has been a very strong opponent of that idea, with Ben, who is a strong proponent of that idea."

An implication of strict rules on monetary policy is an increase in accountability for the Federal Reserve Bank.

Until now, there has been little or no transparency in just precisely what targets the Fed is seeking. All we've known is what Greenspan has wanted to tell us after each meeting of the Federal Open Market Committee. Now, all that may change in the very near future.

It will be interesting to see the public reaction if the Fed doesn’t measure up to its newly specified objectives. More obvious goals make for more obvious failures when things go wrong.

--Matthew McCoy