Bernanke faces reputation as inflation 'dove'

Martin Wolk Chief economics correspondent • Profile • E-mail

With his unquestionably solid qualifications to serve as next chairman of the Federal Reserve, Ben Bernanke is likely to win easy Senate approval to take over the powerful post from Alan Greenspan early next year.

But some market analysts say they fear the former Princeton University professor might be too soft on inflation and lacks the strong stomach needed to fight structural imbalances that threaten the nation’s long-term economic health.

Bernanke’s image as an inflation “dove” stems in large part from his role as the central bank’s leading voice warning about the potential dangers of deflation when he was a Fed governor from 2002 until this year. In his landmark November 2002 speech on how to fight deflation, Bernanke said one possible tool would be a broad-based tax cut which he described as “essentially equivalent to Milton Friedman's famous ‘helicopter drop’ of money.”

That has led to an exaggerated image of a Bernanke so committed to growth at any cost that he would personally fly around dropping dollar bills from the sky if needed.

“Of course it was taken out of context,” said Axel Merk, manager of the Merk Hard Currency Fund in Palo Alto, Calif. “He was just speculating. But you get the feeling that he is very willing to do whatever it takes to get the economy into whatever shape he wants it to be in.”

Merk has been a regular critic of the chairman-designate in market commentaries over the past year, arguing that Bernanke could usher in an era of higher inflation, slower growth and a weakening dollar.

Chip Hanlon, president of Delta Global Advisors, also worries about the implications of Bernanke’s 2002 speech, which included the observation that the government “has a technology, called a printing press,” that can be used to manufacture inflation if needed.

Hanlon said Bernanke “should actively work to distance himself” from that statement.

“That high-profile statement has not been forgotten, and it suggests that when in doubt he will lean toward the side of a loose, inflationary monetary policy,” Hanlon said in a commentary. “While equities markets may welcome such a ‘stimulative’ mindset, currency markets will likely treat Bernanke with great suspicion, particularly with regard to the U.S. dollar.”

Indeed while the stock market rallied Monday on news of the nomination, the dollar fell and market interest rates rose on concern that Bernanke, currently chairman of President Bush’s Council of Economic Advisers, might be less effective than Greenspan at fighting inflation.

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