Ben S. Bernanke in 2005

14 Pages Posted: 21 Oct 2008

See all articles by Wei Li

Wei Li

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Abstract

The case has been used in a first-year required course called Global Economies and Markets in a module on monetary policy. On October 24, 2005, President Bush nominated Ben S. Bernanke to be chairman of the board of governors of the Federal Reserve System for a term of four years along with a 14-year term on the board of governors. With the U.S. Senate confirmation widely anticipated, Bernanke was expected to take over stewardship of the U.S. monetary policy from Chairman Alan Greenspan when he retired in January 2006. While the U.S. economy was in good shape at the end of 2005, Bernanke had to prepare to deal with two challenges when charting a course for managing U.S. monetary policy. First, the sharp rise in energy prices that began in 2002 had the potential to bring back the specter of inflation and dampen desired consumer and business spending. Second, the housing boom could turn into a housing bust, throwing the mortgage industry into turmoil and weakening consumer business confidence. There was also the possibility that the housing bust could affect broader financial markets. Bernanke had to consider his options for dealing with contingencies in the not-so-distant future.

Excerpt

UVA-F-1510

Ben S. Bernanke in 2005

On October 24, 2005, President Bush nominated Ben S. Bernanke, PhD, who had been serving as chairman of the Council of Economic Advisers since July 21, 2005, to be chairman of the board of governors of the Federal Reserve System for a term of four years. Stock markets rallied on the announcement. With the U.S. Senate confirmation widely anticipated, Bernanke was expected to take over the stewardship of the U.S. monetary policy from Chairman Alan Greenspan when he retires in January 2006.

The incoming chairman inherited a stable economy, with solid growth and low inflation. Real GDP growth in the third quarter of 2005 was revised up from 3.8% to 4.3%, reflecting stronger consumer, business, and federal government spending. The expected inflation rate for 2005, measured by the growth rate of the consumer price index, was 3.9% (Exhibit 1). But the problems he had to handle were big. The sharp rise in energy prices since 2002 (Exhibit 2) had the potential to bring back the specter of inflation and dampen desired spending by consumers and businesses. In addition, the housing boom was expected to simmer down in the near term (Exhibit 3), which, depending on the speed of adjustment, could further reduce consumer spending. Another area of concern for the incoming chairman was the federal budget deficit (Exhibit 4), even though he has stated publicly that unlike Greenspan, he would begin a practice of not making specific recommendations on tax or spending proposals.

Despite his advocation of an explicit inflation rate target and more transparent communication about the Fed's perspective and projected policy path, Bernanke recognized that his immediate priority would be to maintain continuity with the policies and policy strategies established during the Greenspan years. Thus, the first task at hand would be to determine the best course of policy action given the state of the economy.

Energy Prices

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Keywords: Monetary policy, central banking, oil price, housing market, interest rates, macroeconomics, macroecnomic management, exam case

Suggested Citation

Li, Wei, Ben S. Bernanke in 2005. Darden Case No. UVA-F-1510. Available at SSRN: https://ssrn.com/abstract=1279951

Wei Li (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
804-243-7691 (Phone)
804-243-7681 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/li.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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