Bernanke Nomination Sparks Wall Street Rally

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Ben Bernanke left little doubt that, if confirmed to succeed Alan Greenspan as chairman of the Federal Reserve, he'll have no problems talking to Wall Street. His "top priority," he said in accepting the nomination Monday, would be to "maintain continuity with policies" put in place during Greenspan's widely hailed 18-year tenure. That's just what traders wanted to hear. Stock prices were floating higher already in the wake of some good corporate earnings reports and falling energy prices. But the appointment of Bernanke, 51, fueled more buying in the afternoon (the Dow closed up 169.78 points) and, says Jeff Kleintop, chief investment strategist at investment firm PNC Advisors, "could set up a good fourth-quarter rally."

Bernanke, who has an undergraduate degree in economics from Harvard, a Ph. D. in economics from the Massachusetts Institute of Technology and has headed the economics department at Princeton, was known to be on President Bush's short list. It now appears that he's been being groomed for the top Fed job since June, when Bernanke left the Fed's board of governors to serve as chairman of the President's Council of Economic Advisers. The Fed is supposed to operate independent of politics. But part of the Greenspan legacy was his ability to work with the White House. Keeping open that line of communication is seen as vital, rendering Bernanke's recent months working with Bush all the more important.

Bernanke may be made in Greenspan's image, but he'll do some things differently. He's known to be plainspoken. "We probably won't have to parse everything he says," says Kleintop. That would be a welcome change from Greenspan's often indecipherable econospeak, which came to be known as "Greenspam." Bernanke, a family man who has served on his school's board, is also known to be slightly more tolerant of inflation in pursuit of policies that promote growth. He has argued for adopting an inflation target rate, and making it public, to help demystify the Fed. It's not clear what inflation target Bernanke favors. But it's probably something close to 2% in core prices—about the rate seen the past 12 months.

Greenspan, who took over at the Fed just two months before the 1987 stock market crash, will step down on Jan. 31. By then, many believe he'll have finished his nearly two-year campaign of boosting short-term interest rates from the historic lows reached after the Internet bubble burst in 2000. If so, Bernanke would take the helm with the benchmark fed funds rate at about 4.5%, considered neutral in terms of growth, leaving him with plenty of immediate operating room—and just possibly a stock market finally getting some lift.