Bernanke's Fed tactics were unique

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Washington - As Federal Reserve Chairman Ben Bernanke shuts the door to his office for a final time in two days, he can say he took actions that were the first or the biggest of their kind in the central bank's 100-year history. Some will probably also be the last.

Bernanke was the first to devise a monetary policy that focused on lowering credit costs by suppressing longer-term interest rates after the short-term policy rate hit zero. His strategy, involving direct purchases of agency mortgage-backed securities and longer-term Treasury debt, left the Fed with the biggest balance sheet in its history, $4.1 trillion.

He was the first chairman since the Great Depression to use emergency lending powers to rescue businesses in almost every corner of the financial system - from banks, to corporations, to bond dealers. And he might be the last: Congress, leery of the Fed's sweeping powers, removed the central bank's ability to loan to individuals, partnerships and non-bank companies.

"He was incredibly creative in the different steps and programs he took to prevent a free fall of the global economy," said Kristin Forbes, a professor at Massachusetts Institute of Technology's Sloan School of Management in Cambridge and a member of the White House Council of Economic Advisers under President George W. Bush. "During a crisis, you have to make decisions with highly imperfect information. He was willing to do that."

Bernanke, 60, leaves a Fed vastly different from the institution he took charge of on Feb. 1, 2006. At that time, the former Princeton University professor had a few goals. He said naming an inflation target would help boost accountability and policy effectiveness. He also wanted to push power out of the chairman's office down into the policymaking Federal Open Market Committee, in effect, to dilute some of the mystique his predecessor Alan Greenspan created.

Eight years later, Bernanke achieved those goals. The Fed declared an inflation target of 2 percent in 2012, and the FOMC is more democratic. The Fed chairman encouraged more open debate at policy meetings, allowing colleagues to interrupt the format if they wanted to make a point. Unlike Greenspan, Bernanke voices his policy view last.

Among other Bernanke innovations, central bankers publish their economic forecasts, including their outlook for the policy interest rate they set, four times a year. The chairman holds a press conference quarterly.

The crisis response also transformed the institution in ways that defy any near-term conclusion because nobody knows whether extraordinary actions, like purchasing $1.5 trillion in mortgage debt or creating $2.4 trillion in excess bank reserves, can be retracted, shrunk and unwound successfully.

The Fed is more extended politically as it engages in policies such as suppressing mortgage rates, and the size and influence of its open-market operations have involved it in financial markets as never before.

"The legacy is still open," said Vincent Reinhart, a former top Fed official and now chief U.S. economist at Morgan Stanley in New York. "We survived. The question is what are the consequences?"

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