The Ignorant Investor

I don't follow the Federal Reserve closely, and I wasn't even aware that Federal Reserve Gov. Roger Ferguson resigned until it was pointed out to me in a comment in the blog.

Ferguson was appointed by Clinton years ago, and he appears to have had a good reputation among the financial community. The timing of his resignation seems a little odd because two new governors appointed by Bush were confirmed at almost the same time. However, he is at an age where a man thinks about accumulating great wealth, and this might have been a good time for him to head for Wall Street to cash in on his experience. Basically, we'll never know why he boogied.

On the broader question of the significance of the news, the financial press is pushing the angle that Ferguson's departure clears the decks for new Fed Chairman Bernanke to move the Fed towards inflation targeting in setting short term rates.

Personally, I think you've got to be an economist to be interested by the dispute over rate setting policies. Although there is an issue over whether inflation targeting is preferable to the current approach, it's not clear to me that Bernanke's viewpoint differs with traditionalists like Greenspan. Based on what I saw in the opening of Bernanke's book on inflation targeting (please, you expect me to read more than the first ten pages of an economics tome?), his approach amounts to the Fed publicly announcing that they're going to keep rates high enough to keep inflation low -- I can't imagine the target range will be over 4% -- while maintaining the discretion to stimulate the economy with low interest rates when they deem it necessary. Honestly, is that significantly different than the current approach?

At heart, I think the concern over Bernanke is that he'll be too dedicated to keeping inflation low instead of flooding the market with cheap money like Greenspan liked to do. Wall Street and Washington appear to dread the prospect of a steep recession, but Bernanke sees inflation as a greater threat than a slowdown. In his eyes, low inflation breeds economic growth over the long term, even though there may be shocks to the system over time. That's my view of the guy, anyway. Whether he can stick to that in the face from massive public pressure to do exactly the opposite is an open question. Hard to know how someone will face up to that until it happens. Some guys will dig in their heels and stop reading the papers, convinced that they're right. Others won't. They just crumble and look for the resulting accolades from the crew at CNBC.

Ferguson's spot is now open, obviously, and I'm very curious to see who Bush appoints to replace him. My odds are running 7-4 that it's a political loyalist over some highly regarded professor or a current, long-serving insider at the Fed.