Gentle Ben?

HEADNOTE

The Fed's incoming chairman confronts a choice: Suffer now or later?

As BEN S. BERNANKE TAKES OVER AS chairman at the Federal Reserve System, the influential federal funds rate is in the middle of what most

economists would consider the "neutral zone." However, as he succeeds Alan Greenspan, Bernanke confronts what in essence is a political decision: Does he want the U.S. economy to be weak now and strong in 2008 to enhance the chances of a Republican victory, or does he want it to be stronger this year and weaker in the future?

This year will be a lousy year, and if the Fed continues to tighten monetary policy anyhow, it will cause a more severe slowdown while knocking the stuffing out of inflationary expectations. Under this course of action, the Fed can ease in 2007, and the economy will come roaring back in 2008. (Keep in mind that there is about a one-year lag between changes in Fed policy and changes in the economy.) On the other hand, as signs of the slowdown accumulate, Bernanke may be under increasing pressure to abandon further increases in the funds rate, and as the new kid on the block, no one knows how well he will stand up to that pressure. Especially if the designated headhunters in the Republican Party start sniping at him.