Bernanke's Hard Task: A Soft Landing

When the newly installed Federal Reserve Chairman Ben S. Bernanke sent stocks plunging 200 points Monday with his latest inflationary warning, this was not another case of the rookie central banker shooting off his mouth. Rather, this was a carefully calculated message to lessen inflationary expectations in markets and the real economy.

''This is theater,'' said one longtime Fed-watcher, meaning that Bernanke is playing a role in hopes that words will make action unnecessary. A more apt metaphor might be that Bernanke is the aviator flying the Federal Reserve monetary airplane, seeking a soft landing from the growth economy without crashing into a recession.

This is the test for America's central banker, at the controls of the global as well as the U.S. economy. Monetary aviation is difficult and risky. Alan Greenspan, Bernanke's predecessor at the Fed for more than 18 years, was renowned for his mastery there. In fact, the man now referred to on Wall Street as ''The Legend,'' out of three attempted soft landings, crashed and burned two times -- a poor average for central bankers. One such crash in 1992 contributed to the defeat for re-election of President George H.W. Bush.

Greenspan and Paul Volcker, the two celebrated chairmen preceding Bernanke, each inflicted pain on the economy. Volcker, who was facing double-digit inflation and interest rates when President Ronald Reagan took office in 1981, applied shock treatment with unprecedented money tightening. That contributed to the recession that cost Republicans in the 1982 election.

Greenspan, responding to critics calling him a ''political hack'' when he replaced Volcker in 1987, forced a discount rate increase on Sept. 4 even though the Fed already was tightening. On Oct. 19, the stock market suffered its worst crash since 1929. Bernanke has not engaged in anything like the dangerous and severe austerity steps taken by Volcker and Greenspan. Nevertheless, he has been ridiculed as a bumbler because of one early misstep.

Bernanke was chatting with a gaggle of journalists April 29 during a reception at the White House Correspondents' Association dinner, when he answered a question from CNBC anchor Maria Bartiromo. He suggested the market's current rise was inappropriate in expecting that the Fed had finished raising interest rates. The other reporters ignored his comments as old news, but Bartiromo reported it as an exclusive May 1 -- temporarily deflating stock prices.

Since then, Bernanke has been careful about what he says to reporters at social receptions. Actually, he is a sophisticated and experienced hand in big-time Washington policymaking. He is the first Fed chairman with previous membership on the Federal Reserve Board (having served as a governor for three years before heading the President's Council of Economic Advisers) since W.P.G. Harding was named by President Woodrow Wilson in 1916.

The soft landing attempted by Bernanke involves tough talk instead of painful action. He talked to fellow central bankers from around the world in Washington Monday but was addressing markets and businesses when he warned ''core inflation'' during the last three to six months would be at ''the upper range'' of what was ''consistent with price stability.''

That was widely interpreted as promising the 17th interest rate increase in the next two years, but Bernanke really was trying to stifle inflationary expectations without strangling the economy. People familiar with his thought process see him trying to stave off a mind-set that leads the economy to a rampage of price and wage increases.

I have often reported that Fed chairmen, dating back to William McChesney Martin's long tenure (1951-1970), tend to overshoot the mark in tightening money to curb inflation. Bernanke may be overshooting even now. But whereas this overreaction to inflation may take nine months to a year to correct, undershooting the danger may create expectations taking four years or more to overcome.

Bernanke is attempting his soft landing as a lone eagle. He is not a favorite of the big Federal Reserve professional staff, who are much closer to their former colleague (of 32 years standing), Vice Chairman Donald Kohn. Bernanke's ability to manage national and international monetary policy is being tested.