The New Fed

Welcome to the era of the diminished Fed. For more than 25 years, Main Street and Wall Street have stood in awe of America's central bankers, the mythic figures who chaired the Federal Reserve. The Fed itself was far more powerful than any other central bank. But the time of the heroic central banker and the all-powerful central bank is coming to an end. If the incoming Fed chairman, Ben S. Bernanke, has his way, monetary policy will depend much less on the force of will, keen economic insights, and other exceptional qualities of the Fed's chief. Instead, Bernanke will move the Fed toward clear and coherent rules for hitting publicly announced inflation targets - an operating style that he calls "constrained discretion." At the same time, the increased importance of international financial flows will make it much harder for the Fed to have the clout, both at home and abroad, that it once did. So both out of choice and out of necessity, Bernanke is going to preside over a diminished Fed. In fact, he's one of a worldwide group of top monetary economists who have concluded that the right thing to do is to shrink the scope of central banks everywhere and get them back to their mission of fighting inflation.