The markets welcome Greenspan’s successor

Ben Bernanke has been named as Alan Greenspan's replacement as chairman of the US Federal Reserve, and the news seems to have gone down well with the world's equity markets: they nearly all rose on the news, with the Dow jumping 170 points, its biggest one-day move since April.

Still, the appointment should hardly have come as much of a surprise. It was widely predicted and had been since Bernanke's move to the White House to head up president Bush's Council of Economic Advisers. And having nominated Harriet E Miers to the Supreme Court - against almost everyone's advice - Bush was hardly in a position to make another controversial appointment.

Still, while everyone seems happy with Bernanke, that doesn't mean that he is going to have an easy time of it. Alan Greenspan will be remembered for presiding over the longest-ever period of post-war economic growth in the US (1991 to 2001), but the legacy he is leaving his successor is not a nice one. Inflation is on the rise, with the oil price now expected to stay at current levels indefinitely; property prices appear to be bubbling (even Greenspan says so); Americans are saving nothing and carrying far too much personal debt; and both the federal and current-account deficits appear to be out of control. If Bernanke ever wants to retire with the kind of reputation Greenspan's got - deserved or not - he's got a lot to do.

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There is a feeling in the markets that Bernanke is a bit of a clone of Greenspan, said Joel Havemann in The New York Times (that's why equities have risen). But that isn't really fair. It is true that while at the Fed (where he was a governor before his move to the White House) he sided with Greenspan on every interest-rate decision, but there is a big distinction in style between the two "that could make a difference in interest-rate policy and crisis management". While Greenspan is famous for his obfuscatory announcements, which different market participants often end up interpreting in different ways, Bernanke has a reputation for being outspoken and, "surprisingly for a member of an institution that deal in riddles", said Malcolm Moore in The Daily Telegraph, "easy to understand". So much so in fact that he may have to be careful not to spook the market by being too direct in his comments. This should prove interesting to a market more used to having to glean slivers of meaning from Greenspan.

The area where his directness might make a real difference, however, is when it comes to controlling inflation. Greenspan, often described as a seat-of-the-pants central banker', has long made decisions on instinct as well as by analysis, and has preferred not to set inflation targets in case it hindered the Fed's ability to react to a changing environment. Bernanke, on the other hand, has both spoken and written in favour of inflation targeting', setting an inflation goal and adjusting rates to achieve it (as the Bank of England does), the idea being that stock and bond markets are less nervous when they know what the Fed is up to.

The question, of course, is where exactly Bernanke might want to set those inflation targets. He is known to consider deflation much more of a threat than inflation (it is much harder to turn around once it has started), but he has also made it clear in the past that he believes central bankers should act rapidly and aggressively to head off inflation by raising interest rates before it becomes a problem. If he acts on his own words, the market may not like him as much as it seems to think it will.