Greenspan's heir apparent

As the nominee to be the next chairman of the Federal Reserve, Ben Bernanke will face, quite literally, a world of economic challenges.

The man tapped Monday by President Bush to replace Alan Greenspan will be tasked with guiding both the US and the world economy through what many experts call a period of "global imbalance."

The US is the world's great consumer nation, but as such is racked by multiple deficits: A trade deficit, a federal budget deficit, and what can be called a "household deficit" of ordinary consumers whose spending has been financed in recent years partly by soaring home values.

Other nations, notably China, have taken the role of suppliers not just of goods but of credit, buying US Treasury debt and helping to keep US interest rates low.

For some time, those growing imbalances have built without damaging the global economy. But at some point, economists say, the US will need to start spending less and saving more.

In a world where American consumption has long been an engine of global growth, that transition may not be an easy one for either US consumers or for the world economy. The challenge may well define the tenure of the next Fed chairman.

Mr. Bernanke is now chairman of the President's Council of Economic Advisers. Yet his background also includes a stint as Fed governor and expertise as a monetary economist, traits that will be crucial to convincing global markets that his selection is not based merely on the political preferences of the Bush White House.

The appointment, indeed, comes at a time when the Bush administration is eager to score a political victory and to deflect attention from acrimony within the president's own party over his selection of Harriet Miers as a nominee for the Supreme Court.

The selection of Bernanke follows a pattern Bush has set in his second term of often choosing close associates for high-level appointments.

Before being picked for the high court, Ms. Miers was Bush's longtime legal adviser. Karen Hughes and Condoleezza Rice, too, held high-ranking positions within the Bush White House before being appointed to their jobs at the State Department.

Against that backdrop, Mr. Bernanke's credentials as a respected and independent economist will be vital. Investors in stocks, bonds, and currencies who move global markets want assurance that the next Fed chief will guide the world's largest economy with prudence, not politics.

For months, Bernanke had been mentioned as one of the leading candidates to lead the Fed. In that respect, the White House made a safe choice.

"His academic work on inflation targeting will be of great comfort to many market analysts and investors who are beginning to fret about inflation," said Nariman Behravesh, chief economist with Global Insight, an economic forecasting firm in Lexington, Mass.

Stock prices quickly rose about 1 percent as the news broke in the middle of Monday's trading. Wall Street analysts attributed the rally to the removal of uncertainty over the succession.

If cleared by the Senate to start in February, Bernanke would replace a man revered by many investors. But Bernanke is unlikely to be a Greenspan clone.

Bernanke has called for the central bank to be more specific in its inflation objectives. Greenspan has opposed setting a numerical target for inflation.

Bernanke also has championed openness at the Fed - a policy that Greenspan has advanced prominently. Yet Bernanke is considered more plain- spoken than Greenspan, whose economic pronouncements sometimes seemed mystifying.

A summa cum laude graduate of Harvard University in 1975, Bernanke received his doctorate from the Massachusetts Institute of Technology in 1979. During his years in Boston, he focused on the economic underpinnings of the Great Depression and the losing track record of the city's beloved baseball team, the Red Sox.

"Economics is a very difficult subject," Bernanke once said. "I've compared it to trying to learn how to repair a car when the engine is running."

Now no one will face more pressure to perform that mechanical feat from day to day.

For any central bank, inflation is enemy No. 1, and it must be fought amid the uncertainties of an economy in motion. In recent months, inflation has been rising along with energy prices, while economic growth has remained strong. Meanwhile, many economists say that higher interest rates may help to tame not only inflation but also an overheated housing market.

In an interview published the Minneapolis branch of the Federal Reserve in 2004, Bernanke said that "announcing an actual number or range [for inflation] would serve to anchor public expectations of inflation more firmly and avoid the risk of 'inflation scares' that might unnecessarily raise nominal bond yields."

Financial markets, he argued in the interview, would be well served by knowing the Fed's rough target for inflation, the rate of price change in the economy.

That view reflects how the management of expectations is a critical role for central bankers.

As Greenspan has navigated toward his own retirement, after 18-1/2 years in the post, the Fed has been on a path of "measured" interest rate increases. The goal is to bring monetary policy back toward "neutral," allowing full growth but not fueling inflation with easy credit.

Since the recession of 2001, the Fed's monetary policy has been stimulative. It slashed interest rates to as low as 1 percent.

Since mid-2004, with the economic expansion finally picking up pace, the Fed's rate-setting committee has boosted its short-term interest rate (charged to banks on overnight loans) by a quarter of a percentage point at every meeting. That rate now stands at 3.75 percent, and is expected to be above 4 percent when Greenspan hands the reins to his successor.

• AP material was used in this report.

Education:

BA in economics, 1975, Harvard University; PhD in economics, 1979, Massachusetts Institute of Technology.

Experience:

• June 2005 to present, chairman of the President's Council of Economic Advisers.

• 2002-2005, member of the Board of Governors of the Federal Reserve System.

• 1996-2002, professor and chairman of the Economics Department at Princeton University.

• 1985-2002, economics professor at Princeton University.

Family:

Wife Anna; two children.