greenspan's successor takes over at a crucial point in the us rate cycle and his next move will be carefully monitored
After more than 18 years in the post, Alan Greenspan stepped down as chairman of the Federal Reserve last week.
During his time as chairman, Greenspan came to dominate the Federal Open Markets Committee (FOMC), the body that sets US interest rates.
According to Tony Dolphin, director of economics and strategy at Henderson Global Investors, Greenspan was widely considered to be the most influential economic policy-maker in the world. Dolphin said: "US interest rates are important because they represent the price of money in the largest economy in the world, and they also influence the price of money in many other economies. It is no exaggeration to say that if the FOMC sets interest rates too high, it could produce a global recession, and if it sets them too low, it could allow global inflation to reawaken.
"It is no secret Greenspan got what he wanted in the way of US interest rate policy, and it remains to be seen if Ben Bernanke, his successor, will dominate the FOMC in quite the same way.
"He takes over at a crucial point in the interest rate cycle. Bernanke has to decide whether it is appropriate to leave interest rates at this level for a period to assess the impact on the economy of the rise in interest rates from 1% to 4.5% over the last 19 months, or to continue to push rates higher."
Greenspan originally took office as chairman in 1987. He was then reappointed to the board for a full 14-year term, which began in 1992 to end in January 2006. He has been designated chairman by presidents Ronald Reagan, George Bush, Bill Clinton and George Bush. During his long tenure, he has helped steer the economy through the crash of 1987, the recession of the early 1990s, the dot-com bubble and the terrorist attacks of 11 September.
During his pre-Federal Reserve professional background, Greenspan was the chairman and president of Townsend-Greenspan & Co, an economic consulting firm in New York City. However, during this time he sat in a number of advisory roles including chairman of the President's council of economic advisers under President Ford, and chairman of the National Commission on Social Security Reform.
In a official statement, Greenspan said: "The President has made a distinguished appointment in Bernanke. He comes with superb academic credentials and important insights into the ways our economy functions. I have no doubt that he will be a credit to the nation as chairman of the Federal Reserve Board."
Ben Bernanke profile
Prior to his appointment as chairman of the Federal Reserve, Ben Bernanke served in a number of roles including chairman of the President's council of economic advisers. Prior to this appointment, he also served as a member of the board of governors of the Federal Reserve System.
He has a BA in economics from Harvard University and a PhD in economics from the Massachusetts Institute of Technology. Before becoming a member of the board, Bernanke was the Howard Harrison and Gabrielle Snyder Beck professor of economics and public affairs, and chair of the economics department at Princeton University (1996-2002).
He has also published a number of books on a economic issues, including monetary policy and macroeconomics, and he is the author of several scholarly books and two textbooks.
Sri Kumar, SG American Growth fund manager at Société Générale Asset Management, said: "The President's choice in early October of White House lawyer Harriet Meiers to be his nominee to the Supreme Court was poorly received, and led to fears the Federal nominee might also be a relative unknown and a surprise choice.
The choice of Bernanke to fill the spot of Federal chairman was, therefore, reassuring news, causing equities to react positively.
Still, worries persist as to whether Bernanke, will be able to end the Fed's long cycle of interest rate increases soon after taking office. We believe the estimated slowdown in US domestic growth during the final quarter of 2005, and the persistence of inflation at benign levels, will enable a Bernanke-led Fed to end the steady monetary tightening which began in June 2004."
Peter Toogood, CIO at Forsyth Partners, said: "The institutional role of the Fed is not in danger. Bernanke's takeover will not change the structure or affect the historical presence of members such as Roger Ferguson and Donald Kohn.
"The inflation rate has never gone above 2% with Greenspan, but deflation could be an issue in the future. Bernanke will not have an easy ride.
"In terms of immediate impact, we anticipate US rates being held at 4.5%. Global deflation is likely to be the major concern since modest wage growth is putting little pressure on inflation.
"Concern has also mounted about a further inversion of the Treasury yield curve, traditionally a precursor to an economic slowdown. Nevertheless, US consumer confidence has rebounded to pre-Gulf hurricane level and economic growth could potentially surprise on the upside in 2006."
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