Ben Shalom Bernanke, Ph.D., took the helm at the Federal Reserve as the successor to Alan Greenspan, when the illustrious Fed chair retired on January 31, 2006 after 19 years of service. (A Farewell To Alan Greenspan follows the economic glories and bumbles in the career of the previous Fed chair.)

Bernanke was appointed to the position by President George W. Bush to a four-year term that expires January 31, 2010, but can be extended by the president. As part of the appointment, Bernanke will also be a member of the board of governors of the Federal Reserve System for a 14-year term expiring January 31, 2020, regardless of whether he remains the chair.

Clearly, Bernanke will be at the forefront of key economic decisions for quite some time. Here, we'll take a look at Bernanke's background and speculate on how it might affect his decisions going forward. (For background reading, see The Federal Reserve tutorial.)

The Right Man for the Job
When President Bush introduced Bernanke to the world, he stated that "Ben Bernanke is the right man to build on the record Alan Greenspan has established." Bernanke's credentials include:

Educational Background
Bernanke earned an impressive set of academic credentials, including a Ph.D. in economics from Massachusetts Institute of Technology in 1979, and Bachelor of Arts in economics from Harvard in 1975, graduating summa cum laude. His academic prowess was apparent even in high school, where his SAT score of 1590 set a state record.

Professor Bernanke
Bernanke was also a professor of economic and public affairs at PrincetonUniversity from 1985-2002, where he chaired the economics department from 1996 to 2002. Prior to his arrival at Princeton, he was associate professor of economics from 1983 to 1985 at StanfordUniversity and an assistant professor from 1973 to 1983. His long teaching career also includes serving as a visiting professor of economics at New YorkUniversity in 1993 and at the Massachusetts Institute of Technology from 1989 to 1990.

Professional Background
Bernanke was chairman of the President's Council on Economic Advisors from June 2005 to January of 2006, served on the Federal Reserve Board of Governors from 2002 to 2005 and was as a visiting scholar at the Federal Reserve Bank of Philadelphia from 2002 to 2005. Prior to this he was a member of the Academic Advisory Panel at the Federal Reserve Bank of New York from 1990-2002, and a visiting scholar at the Federal Reserve Bank of Boston from 1989 to 1990.

Over the course of his long career, Bernanke has published a number of books and a wide variety of articles on economic issues. He has held multiple fellowships, including a Guggenheim Fellowship and a fellowship at the AmericanAcademy of Arts and Sciences.

Philosophy
Due to the importance of the position to the market and the economy, it is good to get a sense of the philosophy of the man heading the Federal Reserve. Bernanke is seen as a less outspoken voice than Greenspan, who would regularly chime in on areas outside monetary policy, including commenting on budget deficits and tax cuts. Bernanke is also a vocal advocate for a more transparent Federal Reserve, which is decidedly different from Greenspan's notorious "Fed Speak".

Based on Bernanke's previous writings and comments, we can get a sense of his personal philosophy and what he brings to the position.

Inflation Targeting
An area where Bernanke differs from the Fed's course under Greenspan involved setting a specific numerical goal for inflation. While many European central banks, including the Bank of England and the European Central Bank, set specific targets for inflation, the United States has not done so, and Greenspan was not an advocate of such an approach. Bernanke's initial days in office highlighted this major philosophical and style differences compared to Greenspan, which riled the markets.

This potential policy change to a defined target created unease among some market analysts, since Greenspan had never tried to hold a firm rate. This unease settled once Bernanke backed away from articulating his want for a specific target. Since then, Bernanke has continued to bring more openness to the position, especially when he increased the frequency and outlook of the Feds forecasts in late 2007. The Federal Reserve now publishes quarterly forecasts on economic growth and prices, up from two per year as previously established. These forecasts also reach out three years compared to the two years previously reported.

Deflation
Bernanke's study of the Great Depression instilled a life-long interest in the effects of deflation and its impact on people's lives. It also created a strong aversion to deflation and a strong emphasis on ensuring that deflation doesn't occur. (For related reading, see The Greatest Market Crashes and Recession: What Does It Mean To Investors?)

His feelings about deflation were clarified when he gave a speech in November of 2002 titled "Deflation: Making Sure It Doesn't Happen Here". He referred to economist Milton Friedman's idea of a "helicopter drop" of money into the economy. Adding liquidity to the marketplace by making more cash available to borrowers and cutting interest rates to foster borrowing helps to stimulate the economy and stem deflationary pressure. However, in the context of the meeting this was meant to illustrate the number of tools the Fed has at its disposal - even in a zero-rate environment.

Inflation
While stemming deflationary pressure by increasing the supply of money can have a decidedly inflationary result, this doesn't mean that Bernanke takes inflation lightly. He supports the creation inflation targets for the purpose of keeping inflation relatively low and stable with the goal of fostering stable economic growth.

Conclusion
Bernanke is well-versed on the impact of the Great Depression, one of the U.S.'s greatest financial disasters, and his style was shaped by years of working at the Federal Reserve. Bernanke's ascension to the top job was expected to bring a continuation of the course set by his predecessor. His appointment was viewed favorably by the financial markets, as continuity and stability are valued characteristics for market stability.

Related Articles
  1. Bonds & Fixed Income

    The Treasury And The Federal Reserve

    Find out how these two agencies create policies to stimulate the economy in tough economic times.
  2. Economics

    Alan Greenspan: 19 Years In The Federal Reserve

    Follow the economic glories and bumbles in the career of the previous Fed chair.
  3. Investing News

    Janet Yellen: Background And Philosophy

    Janet Yellen's nomination as chairman of the Federal Reserve Board will mark the first time that a woman has served as head of the board. Her previous experience and credentials won support for ...
  4. Personal Finance

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  5. Economics

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  6. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
  7. Markets

    The (Expected) Market Impact of the 2016 Election

    With primary season upon us, investor attention is beginning to turn to the upcoming U.S. presidential election.
  8. Economics

    3 Things That May Happen at FOMC Meeting

    We are keeping a close eye on what the Fed will say about economic outcomes and participants’ viewpoints at the FOMC meeting this week.
  9. Investing Basics

    Understanding Regulation T

    Regulation T governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers to buy securities.
  10. Economics

    Why the Fed’s Rate Increase is Good (Not Bad) News

    The Fed's widely decision to raise interest rates has garnered plenty of attention, especially from those concerned over the negative economic impact.
RELATED FAQS
  1. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  2. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  3. Do lower interest rates increase investment spending?

    Lower Interest rates encourage additional investment spending, which gives the economy a boost in times of slow economic ... Read Full Answer >>
  4. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  5. Why do some people claim the Federal Reserve is unconstitutional?

    The U.S. Constitution does not mention the need for a central bank, nor does it explicitly grant the government the power ... Read Full Answer >>
  6. What are the goals of a "dove" Federal Reserve head?

    The goals of a dovish Federal Reserve head are to maintain low interest rates, stimulate the overall economy, decrease the ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center