Bernanke’s Debut

Ben Bernanke has testified before Congress numerous times in the past, but today was the first time that he spoke as the Chairman of the Board of Governors of the Federal Reserve. Overall, Bernanke’s testimony struck me as quite optimistic. He mentioned the potential hazards for the economy in 2006 of growing inflation and a possible economic slowdown, but came down clearly on the side of those who think that growth will continue to be solid and strong both this year and next.

When asked about the inverted yield curve, Bernanke said that he thought that the current inversion would be different from historical experience, and not presage an economic slowdown. The reason this time is different, he argued, was because the level of interest rates matter as well as the slope of the yield curve, and that interest rates are currently still quite low and thus not contractionary.

Bernanke spent a good chunk of his speech talking about the importance of long-term inflationary expectations. He argued that such expectations are currently low and firmly anchored in the US, and that this has beneficial effects on long-term interest rates and on the conduct of monetary policy itself. This is an important point, and he is exactly right, of course. That is something that will make Bernanke’s job much easier than it would have been 25 years ago, just as it did Alan Greenspan’s.

It was interesting to see that Bernanke clearly stated that he still fully believes in the “global savings glut” hypothesis that he advanced a year ago. As evidence, he cited the fall in the premium that investors demand on long-term bonds, which he said suggests that investors around the world see lower real returns on capital persisting well into the future.

One thing that he did not talk much about during his prepared remarks was the federal budget deficit or the long term fiscal problems that the US is facing. During questioning, however, Bernanke did clearly say that he thought it was entirely appropriate for him to talk about fiscal policy as Fed Chair, that he would do so in the future, and that he was indeed concerned about the US’s serious fiscal problems.

Along those lines, one way in which I hope that Bernanke distinguishes himself from Alan Greenspan will be if he refrains from offering his personal opinion about whether the fiscal problems should be addressed through tax increases or spending cuts. Greenspan often abused his position to advocate his personal preference for small government. I’m hopeful, and reasonably confident, that Bernanke will not.

Overall, I liked his testimony. During questioning, Bernanke generally provided answers about numerous topics (e.g. the deficit, the minimum wage, trade protection, the regulation of FNMA, R&D, personal saving) that a large majority of professional economists would probably agree with. In that sense, I think that he will be a good representative of the profession’s consensus, to the degree that there is one. And for the most part, I think that’s probably a good thing in the world’s most powerful central banker.


UPDATE: On further questioning about the budget deficit, Bernanke followed up on my above-expressed desire that he refrain from suggesting how to cut the deficit, and specifically said that it is up to Congress to determine how to adjust taxes and spending. As I wrote above, I think this will be a decided improvement over Greenspan’s tendencies.