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.
In sharp contrast, the news of Bernanke's nomination was greeted by a 169-point rally in stocks. For this more optimistic transition, Bernanke has his two predecessors to thank. By showing the ability of the Fed to wrestle and eventually beat firmly entrenched inflation, both Greenspan and Volcker restored confidence in the institution of the central bank. Greenspan also built credibility for his crisis management following the October 1987 stock market crash. But even after that feat, he still found it difficult at times to push through his vision for correct monetary policy. For instance, in February 1991, certain regional bank presidents protested cutting the federal funds rate 50 basis points. Sensitive to the bank presidents' grumblings about being left out of inter-meeting policymaking, Greenspan worked hard in the years immediately following to gain consensus for policy. Only midway through the maestro's tenure did that consensus appear a totally effortless orchestration.
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Alan Greenspan required at least several years to hit his stride at the Fed, yet some now view him as the greatest central banker in history. Greenspan and others have noted that his inflation-fighting job was easier because of the successful efforts of the Volcker Fed. If Greenspan had a platform and strong incentives to at least preserve the achievements of his predecessor, then we must expect Bernanke to be similarly armed and motivated in these days of heightened inflationary pressures.
Bernanke's colleagues on the Federal Open Market Committee will also be highly motivated to preserve the achievements for which Greenspan has received so much credit. We should expect them to be outspoken under Bernanke's chairmanship, as they communicate their own strong commitment to price stability.
But one lesson from history seems clear: We can expect Bernanke to take some time to grow into his new job. That's not a bad thing–it's a time-honored tradition within the Federal Reserve System. And it has served its leaders, the markets and the public rather well. With time, Bernanke might even become another legendary chairman–although three in a row might be a lot to ask for.
The opinions expressed in this article are those of the writer and are not intended to reflect those of the United States Postal Service.
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