Bernanke Takes First Step Guiding Interest Rates

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STEVE INSKEEP, host:

Interest rates are not why people are watching today's Federal Reserve meeting. It's a pretty safe bet the rates are going up. But this is the first meeting led by the new Fed Chairman, Ben Bernanke.

Commentator Ev Ehrlich is a former undersecretary of commerce, and he says if rates go up today, it is because of a decision made a while ago by Bernanke's predecessor, Alan Greenspan.

Mr. EV EHRLICH (President, ESC Company, Former Undersecretary of Commerce): Several years ago, in the face of a recession, the 9/11 terror attack, the collapse of the NASDAQ stock market, and the fear of falling prices, Greenspan's Fed took interest rates down to 1 percent, the lowest they'd been in our lifetime.

That succeeded in reviving the economy, but you can't have free money floating around forever, so the Greenspan Fed began raising interest rates again in judicious small increments. And now, several years later, this policy is coming to an end.

The economy and unemployment are still growing modestly. Higher oil prices have not led to virulent inflation, and the Greenspan policy has worked. Like Joshua, who left Moses on Mount Piska(ph) and then entered Canaan, Bernanke will get to preside over the last leg of Greenspan's journey, even if Greenspan isn't there. It may be that Bernanke Fed, but it's not yet the Bernanke policy.

We'll find out what the Bernanke policy is later, when a new dilemma confronts him. The dilemma is this: a year from now, the U.S. economy likely will be growing a bit more slowly, inflation should be quiescent, and interest rates can stay level, if not decline a bit.

But interest rates everywhere else around the world, in Europe, in Japan, even in China, will probably be higher. Rising interest rates elsewhere around the world mean problems for the U.S. dollar. If interest rates rise in other countries, money will leave the U.S. to follow them there. The U.S. is already being propped up by the Asian Central Banks to keep the dollar from falling. But as private money leaves the U.S., it will get progressively harder for the Asian governments to fill the gap.

That's when we'll learn about the Bernanke Fed. It will face a fundamental choice. The domestic economy will likely be lukewarm, which argues for letting interest fall back. But at the same time, we might need to raise interest rates in order to get the world's investors to keep their money safely tucked away in the American bonds that finance our big government deficits. The problem is, you can't raise and lower interest rates at the same time.

So into the middle of this crossfire will step Bernanke. Will he tell the rest of the world that a falling dollar is their problem and keep rates low? Or will he tell America that you can't live beyond your means forever, and let rates rise?

When he makes that decision, it will then become the Bernanke, not the Greenspan, Fed.

INSKEEP: Ev Ehrlich is President of the ESC Company, an economic consulting firm.

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It's MORNING EDITION, from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

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