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Central Banking's Hot Seat

Give the new Fed chairman time to settle in and win confidence

By Robert J. Pedersen | Updated on January 02, 2006

If recent press reports are indicative, Federal Reserve Chairman Alan Greenspan’s successor, Ben Bernanke, will likely face some skeptics, just as Greenspan did (amazing as that may seem today) in his first few years on the job. But imperfect transitions at the Fed have ended up working out rather well over the past quarter century. It’s ancient history now–and few have reason to recall the event–but it may be instructive to note that Paul Volcker got off to a very shaky start as Federal Reserve chairman when in September 1979 he won a dangerously close 4-to-3 vote to hike the discount rate just six weeks into his tenure. And as president of the Federal Reserve Bank of New York for the four years before becoming chairman, he had been a Federal Open Market Committee insider.

Any veteran bond trader also probably recalls June 2, 1987–the day Volcker’s resignation and Greenspan’s appointment were simultaneously announced. That day the 30-year Treasury bond suffered one of its worst sell-offs ever–a 3.375-point free fall that pushed its yield up by more than 30 basis points. Like Volcker, Greenspan hit the ground running, pushing through a tightening of monetary policy after only three weeks on the job.

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