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A rocky ride for Bernanke


WASHINGTON -- Since taking over for Alan Greenspan Feb. 1, Federal Reserve Chairman Ben S. Bernanke has had a rocky time, and it could get rockier.

The prices of oil and gasoline have surged, driving up inflation expectations even as he raised interest rates to counter them. A softening of housing prices has raised concerns about a bust and potential economic slowdown.

The dollar is beginning to show weakness again and could cause more inflation if it goes into a sharp decline. There is even loose talk of a return of "stagflation," with inflation and slow growth coexisting. Uncertainty is rampant in the markets.

And then there's what could be the worst problem of all - the financial markets can't figure out the new Fed chairman. Many in the markets, in fact, think of him as an "inflation dove" who isn't, and won't be, as strong in fighting higher prices as did Greenspan.

Concern about inflation - and implicitly about how Bernanke will control it - has wreaked havoc with markets over the past two weeks, with the Dow Jones average plummeting and world markets, particularly in developing countries, taking a swoon. Some analysts blame the Fed chief's seemingly contradictory statements on inflation for the decline.

Bernanke made his reputation as an academic who believed the central bank should keep inflation under control. Yet on Capitol Hill last week, he found himself apologizing for a "lapse in judgment" for telling a business television reporter that Congress had misinterpreted his remarks that the Fed would take a pause from raising interest rates after its last meeting. He promised never to make such informal pronouncements again.

Yet some in the markets call him "Helicopter Ben" because of a speech he made in 2002 saying that the central bank would not allow the economy to sink into a 1930s-style deflation and could even drop money from a helicopter to stop it. Even though the economic situation is different now, that unflattering moniker has stuck, said Paul Kasriel, chief economist at Northern Trust Co. in Chicago.

Such assessments of Bernanke cast doubt on his credibility as an inflation fighter, so much so that he might feel compelled to raise interest rates again this month to prove his mettle, even though another rise in interest rates might not be justified.

"Some people see him as an inflation dove," said Linda Hooks, an economics professor at Washington and Lee University. "I think he is in danger of being boxed in by this issue and he might be compelled to raise interest rates even if he's not sure that's the right place to go."

If Bernanke raised interest rates for no other reason than to show that he's tough on inflation, it could cause a greater-than-expected slowdown in the second half of the year, said Kasriel and David Resler, an economist at Nomura Securities International Inc. Kasriel said another rate increase could tip the economy into a recession late this year or perhaps next year.

David Jones, a veteran Fed observer, economist and chairman of a Fort Myers, Fla., bank, also feared Bernanke could overdo tightening simply because he is widely seen as too soft on inflation.

Bernanke, 52, was vice chairman of the central bank and served as President Bush's chief economic adviser before being appointed to replace Greenspan. He taught economics at Princeton, Stanford and New York Universities and the Massachusetts Institute of Technology. He was director of monetary economics at the prestigious National Bureau of Economic Research.

David Wyss, chief economist at Standard & Poor's and another dedicated Fed watcher, says Bernanke has always favored a strong Federal Reserve stance against inflation. Bernanke wrote that the central bank should use an inflation target, such as from 1 percent to 2 percent, to guide its interest-rate decisions.

Bernanke's problem is that the economy appears to be at a turning point, and it is not clear if and how much more interest rates should go up. First-quarter economic growth was near 6 percent but could be half that in the second quarter, and could fall to under 3 percent in the second half of the year, according to several economists.

His perception problem goes back to his taking the chairmanship at a time when the Fed was near the end of its campaign to get interest rates back to a "neutral" level from the rock-bottom interest rates that prevailed after the Sept. 11 terrorist attacks.

Bernanke signaled in Capitol Hill testimony in late April that the central bank might take a pause from raising interest rates after its May 10 meeting. Instead, when it met then, the Fed said it might have to raise interest rates again in June. Since then, the stock market has plunged.

Jones, the banker, said the Fed chief should have kept his mouth shut at the April hearing because the economy is in transition. It was a "rookie" mistake, Jones said.

William Neikirk writes for the Chicago Tribune.

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