Bernanke Would Lead With Words As Well as Rates, Fed Observers Say
Wall Street was growing worried in November 2002 that the Federal Reserve might not be able to keep the economy from tumbling into another downturn.</br></br>Economic growth was sluggish, just a year after a recession and terrorist attacks. And inflation was falling unusually low, even though the Fed's benchmark short-term interest rate was at its lowest level in more than four decades. The Fed couldn't lower the rate much more, and soon might have no power to spur a more vibrant expansion, many analysts speculated.</br></br>Wrong, said Ben S. Bernanke, a former Princeton economics professor who had joined the Fed board just four months earlier.</br></br>Bernanke, in a speech, reassured the markets that the Fed still had several weapons to stimulate the economy and had "most definitely not run out of ammunition." Bernanke also suggested that the Fed had beaten inflation, its arch-enemy since the 1970s, and had shifted its focus to a new danger -- deflation, the crippling decline in overall prices that plagued the United States during the 1930s and Japan in the 1990s.</br></br>To listeners in financial markets, Bernanke's words marked a turning point for the Fed and heralded the arrival at the central bank of a new voice and strategist to help guide the economy through a dicey time.