Inside the Head of the New Fed Chief

By Barbara Kiviat

It's not always easy to listen to Senators bloviating. Yet last week Ben Bernanke, the mild-mannered economist who is approaching his six-month mark as chairman of the Federal Reserve Board, looked as focused as a patient parent listening to a child. Tom Carper, a Senator from Delaware, took note of Bernanke's attentiveness. One departed Cabinet secretary, Carper said, used to appear before Congress and "sit there with papers spread all around him and read this and that." Not Bernanke. "You listen to everyone," Carper said in amazement. And so Carper couldn't help bringing up the obvious question: "What do you actually think about when we give our opening statements?"

Inflation, Senator. And growth rates. And the current account deficit. And inflation. And maybe what's for lunch. When he took over the Fed from Alan Greenspan on Feb. 1, Bernanke became the man portrayed as having his hand on the controls of the U.S. economy. If prices rise rapidly or the economy slows, Bernanke gets blamed. If the economy continues to grow at a healthy clip, he's celebrated.

Theoretically, the Fed chairman isn't all-powerful; whether to raise or lower taxes, for example, isn't up to him. But partly because interest rates, which the Fed does control, fundamentally affect the way consumers and businesses spend money and partly because Greenspan solidified the standing of Fed chairman as a demigod, every thought that Bernanke utters is treated as Delphic. "The U.S. economy appears to be in a period of transition," he told Congress, with the robust growth of the past three years moderating, which in turn should help keep inflation in check. The stock market rallied, anticipating an end--if not in August, then perhaps in Septemberto the two-year cycle of interest-rate rises.

The economy isn't the only thing in transition. The Fed itself is feeling the Bernanke effect. You could take that opening scene of Bernanke carefully considering each Senator's words as a leading indicator that a shift is afoot on Constitution Avenue. Listening, mulling, debating, airing opinions of all stripesthese are hallmarks of Bernanke, honed during his years as an academic economist, first at Stanford, then at Princeton, and that style is spilling over into the way economists at the Fed communicate as they forge the nation's monetary policy. More brainstorming, apparently, means more clarity.

That new approach was on display in the Senate as Bernanke answered questions with a level of precision unknown during Greenspan's 18-year tenure. Greenspan had become famous for long, convoluted answers that could stop time but only rarely ("irrational exuberance") ruffled the markets. Asked about the nation's blooming deficit, Bernanke answered crystal clearly, "Deficits matter because they represent additions to debt that our children and grandchildren will either have to pay through higher taxes or reduced services." Bernanke's wit also made a guest appearance. When Maryland Senator Paul Sarbanes asked Bernanke whether rising rents and their impact on the weakening housing market would make him think "one and a half times" about raising interest rates, Bernanke responded, "No, I'll think twice, Senator."

The shift is about more than clearer communication and punch lines. What's really at stake is a plan to make the Fed a more transparent and accessible institution. When Bernanke first showed up at the Fed as a governor in 2002, he started eating in the cafeteria, much to the surprise of younger economists, who weren't used to governors joining them for lunch and talking shop. When he returned as chairman in February after an eight-month stint as head of the President's Council of Economic Advisers, he resumed his lunchtime habits, not locking himself away in the Fed's private dining rooms. He plays pickup basketball at the Fed gym, posted his minivan for sale on the Fed's electronic bulletin board and showed up at the Fed's July 4 barbecue with his wife, who teaches Spanish, and one of his two children, home from college for the summer.

Bernanke grew up in a small South Carolina town, where his father was a pharmacist and his mother a teacher, an upbringing that still reminds him of the people behind the statistics he pores over daily. "It gave me a different perspective," Bernanke told a local newspaper in 2004.

On the policy front, Bernanke is trying to quicken the long, slow march of frankness at the Fed. Before 1994, the Fed didn't even announce when it was moving interest rates. Bernanke has set up a subcommittee to look at ways the Fed can talk more substantively with investors and the public, and last week he put the Fed forecast--which predicts that real GDP will increase about 3.25% this year and next--at the center of his testimony, a move designed to help people better understand where things are headed. Bernanke is a proponent of explicitly stating the Fed's goals for inflation, in order to anchor expectations so that fear of inflation doesn't become a self-fulfilling prophecy.

Bluntness is of limited value in Washington, however, as Bernanke quickly found out. His cards-on-the-table approach has roiled markets more than once. In April he told Congress that the Fed might pause its interest-rate hikes, a comment that helped send the stock market soaring, since higher rates siphon money away from equities. A few days later, he commented to a reporter that his remarks had been misinterpreted--and she repeated that on air. The market took a dive.

Even though Bernanke is hardly the first Fed chairman to set markets atwitter, he has become slightly more judicious in his remarks. (He has since admitted that his comment to the reporter was a mistake.) And the markets have begun to adapt to the new voice of the Fed--a voice that conveys innuendo and is clear about how unclear the economy can be. As it is now. "He's going to say what he means," says David Wyss, chief economist at Standard & Poor's. "And we have to get used to it."

The greatest drag so far on Bernanke's effort to be more straightforward may be the economy itself. No one, including the Fed, seems to know quite where we are in the interest-rate cycle. The prices of oil and other commodities have gone through the roof, and consumer prices continue to creep upward a bit more than economists would expect, yet the housing market is downshifting and paychecks are relatively constant.

The data aren't helping. Bernanke looks at about 25 sets of data a day, and often they are at odds with one another. While Greenspan had a penchant for obscure statistics, like the production of No. 5 trucks, Bernanke sticks closer to mainstream data. "I never knew what a No. 5 truck was," says Alan Blinder, a former Fed vice chairman and a professor at Princeton. "Bernanke probably doesn't either." The minutes from the May meeting of the Fed committee that sets rates showed that opinions ranged from doing nothing to raising rates 0.5%. The Fed raised rates 0.25% for a then 16th straight time. "You're much better off knowing what the controversies are than operating in ignorance," Bernanke said in a 2004 interview with the Minneapolis Fed. With his push for more candor and exchange, the expression of those controversies is sure only to grow, especially as the Fed attempts to steer the economy toward a soft landing.

With reporting by Adam Zagorin/ Washington, Compiled by Lisa Bergtraum, Charles Lampach