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May 29, 2017

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Bernanke legacy could tie successor's hands

NEW YORK--President Barack Obama's next choice to head the U.S. Federal Reserve could have his or her hands tied if Ben Bernanke and company continue to rewrite the policymaking rule book at their current clip.

Under Chairman Bernanke, who is expected to step down when his current term expires in January 2014, the U.S. central bank has embraced the goal of making the historically shrouded business of setting monetary policy far more transparent.

It has adopted a string of new rules and guidelines to clarify its policy intentions, including an inflation target and a conditional vow to hold interest rates near zero until at least mid-2015.

The next step is being hotly debated now.

Fed policymakers are striving to agree on a set of economic variables, or thresholds — probably particular levels of unemployment and inflation — that would signal when the time to raise interest rates was finally drawing near.

The trick is making a credible commitment that convinces investors to keep longer-term borrowing costs low, thus stimulating the economy, while at the same time ensuring the Fed can react swiftly to changing economic realities.

The concern is that these rules and guidelines will crimp the central bank's flexibility in years to come as it deals with the fits and starts of a protracted U.S. economic recovery.

"The more they do it over the next year, the more the next chair will be constrained," said Vincent Reinhart, chief U.S. economist at Morgan Stanley and a former Fed economist. The "constructive ambiguity" the central bank has famously used over the years to safeguard its policy-setting discretion is slowly disappearing, he said.

Preserving Policy Credibility

In battling the worst recession in decades, central banks around the world have deployed untested tools, such as large-scale bond purchases. They have also often made commitments about how, and for how long, they plan to use the tools.

Their decisions will matter for years to come.

After several grueling years battling a severe financial crisis, the deepest recession since the Great Depression and a disappointing recovery, Fed watchers say Bernanke will likely want to step down when his second term as Fed chief expires, even if Obama wants him to stay.

But the economy is unlikely to have fully recovered by then, leaving any rate-hike cycle to his successor. Fed Vice Chair Janet Yellen and Lawrence Summers, a former White House economic adviser, are both considered possible top candidates for the job.

Whomever Obama nominates will be handed a rulebook from the Bernanke era that will be difficult, and maybe unwise, to erase.

Though the guidelines adopted under Bernanke are not ironclad law, "the credibility of policy actions would be at stake if they were easily overturned," said Peter Hooper, chief U.S. economist at Deutsche Bank Securities.

Age of Improv

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