Fed chairmen and the scary mask

Eons ago, in the pre-Alan Greenspan era, Paul Volcker (Mr. Greenspan's predecessor as chairman of the Federal Reserve System) was touring the Museum of Anthropology at the University of British Columbia. He pointed to an especially fierce native American mask.

"That must have been for their central banker," Mr. Volcker joked for the benefit of the journalists tagging along.

Come Feb. 1, Ben Bernanke will be the one that journalists tag behind when - as expected - he succeeds Greenspan. Will Mr. Bernanke have to figuratively don a ferocious mask in order to tame inflation?

Probably not. But he may have his own monster to tame.

When Fed policymakers raised the short-term interest rate on federal funds to 4.25 percent last Tuesday - the 13th straight hike since June 2004 - they stated cautiously: "Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures."

Translation: "Core" inflation ignores higher energy or food prices. "Resource utilization" likely refers to a possibility of lower unemployment, which would let workers insist on higher wages.

Central-bank chiefs of industrial countries pride themselves on being tough on inflation. Volcker put on his central-banker scary mask to tame rampant inflation soon after taking office. On Oct. 6, 1979, the Fed announced what a Monitor article described as "a historic decision that offers the promise of eliminating inflation in three or four years." It also guaranteed a recession and "considerably more unemployment."

From July 1981 to November 1982, the United States suffered its worst recession since the Great Depression. Volcker's brief switch to a "monetarist" Fed policy, with the central bank giving prime attention to restraining growth in the nation's money supply, succeeded. It stopped double-digit inflation. The cost was high, but Volcker left an economy to Greenspan that was far healthier than it was when Volcker took the job.

Greenspan's Fed is expected to raise interest rates another 0.25 percentage points on Jan. 31, 2006. That, some Fed-watching economists suspect, may be the last rate hike for a while. (They point to the fact that an ongoing description of monetary policy as "accommodative" was removed from the latest statement of the Fed policymakers.)

Bernanke could decide, of course, to establish his credentials as an inflation-fighter by pushing his colleagues on the Federal Open Market Committee for another interest rate hike.

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