New Fed Chairman

President Bush has nominated Ben Bernanke as the new Federal Reserve Board Chairman. Bernanke is a heavyweight standard economics academic from Princeton and has all the right credentials for the job: he has been in Washington before, he knows the Fed from the inside, and is well respected by both sides of the ideological divide. He will surely breeze through confirmation hearings. The issues he will face are not trivial and I am not so sure that his academic background automatically qualifies him as competent: he lacks Greenspan’s hands on touch [Greenspan, the outgoing Chairman is notorious for his lack of faith in economic models per se, preferring an approach grounded more in his experience]. The most immediate problems on the economic horizon remain the housing bubble, the twin deficits [Federal Budget and Trade], and the near term impact of energy prices. Will Bernanke be as tough on inflation as Greenspan? Will he inspire the same degree of confidence in the financial markets? We won’t know for a while. What we do know is that Greenspan had an almost unprecedented reputation, so any apparent ‘loosening’ or political bias will most likely have a larger impact under Bernanke. And that is the biggest risk from this change in leadership at the Fed: increased volatility in the markets at a time when fiscal policy is already a mess.