01/27/2012 04:06 pm ET Updated Mar 29, 2012

After Alan Greenspan, Ben Bernanke Ends Cult Of Personality At Fed Through Transparency

* Achieves new stress on jobs in setting inflation target

* Cleverly makes shifts through policy framework revamp

* Ends era of cult of personality through new transparency

By Stella Dawson

WASHINGTON, Jan 27 (Reuters) - Ben Bernanke has achieved at the Federal Reserve what John Maynard Keynes only dreamed of - that economists be viewed not as cult heroes but as humble, competent people on a level with dentists.

Alan Greenspan, Bernanke's predecessor as Fed chairman, was proclaimed a "Maestro" in a 2000 biography as he presided over the longest-ever U.S. economic expansion, working mostly behind a veil of secrecy and boasting of mumbling incoherently.

In the 1980s, then-Chairman Paul Volcker chomped on a huge cigar, glowered and blinded the public with a blizzard of data on monetary aggregates to wrestle down inflation.

Both were larger-than-life personalities.

Bernanke in contrast cuts a modest figure, and has taken much of the mystique from U.S. central banking by making the Fed a more open institution - a move he forwarded this week by unveiling a new monetary policy framework with an explicit inflation target of 2 percent.

In the process, he is quietly revolutionizing the Fed and leaving a lasting legacy for the framing of U.S. monetary policy.

By adopting an inflation target - a step Bernanke has advocated since his days as a Princeton professor - the Fed chief implicitly gave the central bank more room to concentrate on lifting employment.

"He is a shrewd and extremely smart guy," said Michael Bordo, an economic historian at Rutgers University who specializes in monetary policy and has reservations about the wisdom of the change for fear of a resurgence in inflation.

Already in a break from Greenspan, Bernanke had introduced a more collegial style of discussion at Fed meetings to solicit greater input of views, and in another transparency first, he began holding quarterly news conferences last year.

This week he also released for the first time interest rate projections from all 17 Fed policymakers to help guide markets on the range of thinking within the central bank.

None of these steps seem radical, but they adhere to Bernanke's long-espoused goal of increasing the transparency of the Fed to give investors better information and improve market efficiency.

They also have the effect of giving the Fed new leeway to focus more on unemployment.


The U.S. central bank has a dual mandate - stable prices and maximum employment. Under Volcker and Greenspan, the emphasis was on delivering low inflation - a pressing issue after the stagflationary period of the 1970s. Full employment in their view would flow from the delivery of stable prices.

"Bernanke has moved us back to an earlier time by giving a greater weight to employment," said Bordo.

He has done this in three ways.

First, forecasts Fed policymakers delivered this week show that they expect inflation to meet the new 2 percent target if not undershoot, while unemployment will stay high - clearly exposing that the Fed could fail in its dual mandate.

At 8.5 percent in December, the U.S. jobless rate remains well above the 5.2 percent to 6.0 percent range Fed officials want to achieve.

At the same time, a government reading on Friday on core prices in the fourth quarter showed a sharp pullback in inflation pressures. Prices excluding food and energy rose at a 1.1 percent annual pace, underscoring the prospect that the Fed could miss its new inflation target on the downside.

Second, Bernanke said several times during a news conference on Wednesday that this may warrant action. "If recovery continues to be modest and progress on unemployment very slow, and if inflation appears to be likely to be below target for a number of years ... I think there would be a very strong case based on our framework for finding different additional tools for expansion," he said.

Lastly, analysts said that Bernanke left little doubt that for all his collegiality and stress on collective decision making among the Fed's 17 members, it is the smaller Federal Open Market Committee, which Bernanke dominates as chairman, that has the final say.

"There are no mechanical relationships between these projections and the outcomes of the FOMC decisions," the chairman said. If that wasn't clear enough, he said later: "The FOMC will always trump the projections of forward interest rates."

The message was not lost on Michael Feroli, a former Fed official now at JPMorgan. "This is still the chairman's committee, and as long as Bernanke is the chairman, at least through early 2014, the Fed will remain growth-friendly and committed to doing all it can to ensure the economy recovers," he said in a note to clients.

Thomas Gallagher, a Fed-watching veteran at the Scowcroft Group, agrees. He saw the biggest message underlying Bernanke's explanation of the new policy framework was a determination to pursue further monetary easing to address weak employment.

"He is going to do whatever he can to prevent another recession. He is just going pedal to the metal. That is a pretty powerful stance," Gallagher said.


The Fed has already cut overnight interest rates to near zero and snapped up $2.3 trillion in bonds to try to ignite a faster recovery and ward off deflation risks.

Indeed, Treasury yields fell on Bernanke's message pushing the 10-year note yield below 2 percent, delivering a mild easing through the communication process alone.

Former Fed governor Laurence Meyer of Macroeconomic Advisers is less sure Bernanke is ready to go even further to meet the employment mandate. The conditions Bernanke laid out for that - exceptionally low inflation and inadequate progress in lowering unemployment - have not yet clearly been met, he said. "What's the bottom line? Hard to say."

But New York Federal Reserve Bank President William Dudley on Friday also delivered a decidedly dovish message. "Clearly, much work remains to achieve the Fed's dual mandate of maximum sustainable employment in the context of price stability," he told reporters after a speech.

If the new framework does give the Fed more wriggle room to address weak employment growth, it will not be without controversy. Bill White, former chief economist at the Bank for International Settlements, said the Fed - by focusing on the short-term problems of low inflation and high unemployment caused by a large output gap - fails to look at longer-term credit imbalances.

He said a growing body of research suggests that even when a central bank has an explicit inflation target, inflation expectations can become unanchored, especially when public and private debt levels are large.

"They are constantly giving the economy steroids, or cortisone to ease the pain, which any doctor will tell you that over the long term is deadly," White said.

The Fed's hope is that ever more monetary easing will stimulate economic growth before the debt burdens overwhelm businesses, households or governments. The legacy of Bernanke, whose second term as chairman expires in 2014, is a new policy framework that by heightening the importance of inflation with an explicit target, implicitly strengthens his hand for more easing to get unemployment down. (Reporting by Stella Dawson; Editing by Tim Ahmann and Andrea Ricci)