The watch list for the next Fed chairman

When Ben Bernanke takes control of the Federal Reserve as expected this week, he will have to get off to a brisk start. Among the challenges awaiting him:

• The cost of living is probably running a little higher than the inflation-fighter would like, prompting the question: When should he stop raising interest rates?

• With growth slowing dramatically last quarter, some worry that it could evaporate by 2007. If it does, should he stop raising interest rates sooner rather than later?

• Almost every new Federal Reserve head in modern times has had a crisis hit shortly after taking over the helm. Will history repeat itself?

Yes, as long as the Senate confirms Mr. Bernanke as the 14th Fed chairman, he will certainly get the opportunity to earn his $180,100 salary. He'll have to grapple with the effect on the economy of 13 interest-rate hikes (with the 14th expected Tuesday). By the end of March, he will have to decide whether to keep tapping the brakes on the economy. And through the year, he'll have to keep an eye on energy prices and other potential pocket-busting increases in the cost of living.

Overall, he will be concerned about how the markets perceive his actions. "New Fed chairmen like to come out of the gate looking hawkish as they try to formulate their credibility," says Anthony Chan, an economist at JPMorgan Asset Management in Columbus, Ohio. "Then, they go back to looking more dovish."

Bernanke is likely to display his hawkish side when he looks at the inflation rate. The chairman nominee is an adherent of "inflation targeting" - the setting of a numerical goal for the consumer price index or a similar gauge of the cost of living.

Last year, the consumer price index, not counting food and energy, rose at a 2.2 percent annual rate - a pace that is close to optimal. Including food and energy, prices rose by 3.4 percent. In fact, according to the Bureau of Labor Statistics, the cost of household fuels rose 18 percent and the cost of motor fuel 16 percent.

"Bernanke's big challenge is these stubbornly high energy prices," says Mr. Chan. "The more they persist, the higher the probability of more and more of them spilling over eventually into other areas."

But what can the Fed chairman do to affect the price of a barrel of oil, a commodity that can rise and fall on rumors and incomplete information? "He has control over how he reacts to the high energy prices," says Chan. "As far as it affects inflation, he might use monetary policy as a blunt tool."

Still, longtime Fed watchers think Bernanke will be cautious in making any changes in the Fed's decisionmaking process. "He is enough of a policy wonk to know that how you make change is very, very important," says Bob Brusca, an economist who worked at the New York Federal Reserve. "They will run models and simulations."

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