How Bernanke would fine-tune the economy

Could a computer run the Fed?

That's the essence of a question Federal Reserve Chairman nominee Ben Bernanke once posed in an academic paper. With so many factors affecting the economy, might automated models outperform human judgment in setting monetary policy?

By raising the "man versus machine" query, Dr. Bernanke showed his interest in developing and following clear guidelines - a penchant that could lead the Fed into new terrain if he is confirmed to succeed Alan Greenspan next year.

A central banker's difficult task of balancing rules and flexibility - a task often made trickier by presidential pressure - is a theme Bernanke returned to Tuesday in his confirmation hearing before the Senate Banking Committee.

While Alan Greenspan was seen as running the Fed like an intuitive auto mechanic, assessing the purr and whine of the economy's engine, Bernanke is expected to be more of a textbook mechanic. Yet the distinction, experts say, may prove to be a nuanced one. Both men look closely at economic indicators, and both understand the importance of flexibility in policymaking.

As the world's most powerful banker, Bernanke will be mustering monetary art as well as science, and he knows it.

"People associate inflation targeting somewhat wrongly with rigidity," says Raghuram Rajan, chief economist at the International Monetary Fund in Washington. "His theme as an academic was how to depersonalize this whole process," but not to make it inflexible.

Indeed, although Bernanke has called for the Fed to set specific inflation targets, his answer to the "man versus machine" debate revealed a man not prone to putting the economy merely on autopilot. He and coauthor Jean Boivin concluded in the 2001 paper that man can outperform so-called expert systems. "There clearly remains considerable scope for human judgment about special factors or conditions in the economy," said the two researchers.

For Bernanke, one of the leading experts on monetary policy, confirmation by the Senate appears assured for a term beginning next February. His first task will be to build his credibility in containing inflation and providing the nation with economic guidance independent of political pressures.

Tuesday, the Labor Department reported that wholesale prices jumped by 0.7 percent in October, despite forecasts that wholesale inflation would be flat following a big surge the previous month.

Meanwhile, October retail sales came in stronger than expected, the Commerce Department reported. Excluding automobile sales, which fell sharply, sales of retail goods rose a robust 0.9 percent.

Together, the reports seem to underscore Fed policymakers' current stance that the economy is healthy but that vigilance against possible inflation is needed.

The Fed has been raising its short-term interest rate steadily, by a quarter of a percentage point at each meeting since mid-2004. That short-term rate will probably exceed 4 percent by the time Bernanke would take the helm next year.

Still, the recent rise in both consumer and producer price levels, due largely to rising energy costs, has not driven the so-called "core rate" of inflation sharply upward.

That core rate, which excludes the impact of food and energy on prices, actually fell in October's wholesale report by 0.3 percent, the largest one-month drop in two years.

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