WASHINGTON – If he waits too long, he could cripple the economy. If he stops too early, inflation could get out of hand.
Ben Bernanke's first challenge as chairman of the Federal Reserve will be deciding when to end the central bank's nearly two-year-old rate-raising campaign.
His decision will affect the financial lives of millions of consumers, businesses and investors.
"We are at a transition point. Bernanke takes over the Fed when policy is no longer clear cut," said Diane Swonk, chief economist at Mesirow Financial. "There is no magical number we really know that is the right number to stop at. So his biggest challenge is when to stop."
Bernanke, 52, is slated to succeed Alan Greenspan, who retires on Tuesday after 18 1/2 years at the helm.
Economists predict Greenspan, at his final meeting on interest-rate policy, will oversee the jump of an important rate to 4.50 percent that day. Bernanke's inaugural meeting is March 28.
Interest rates are just one of the challenges facing Bernanke during his four year-term as Fed chief:
--The high-flying housing market. It has played a critical role in supporting consumer spending and the overall economy. If it were to crash, then Bernanke and his Fed colleagues would have to devise a plan to cope with the fallout.
--Trade and budget deficits. Bernanke has gone on record about the need to trim these deficits, which foreigners finance. Japan, China and Britain are the biggest holders of Treasury securities.
If foreign investors were to sour on the United States and unload their holdings, the economy could be in for trouble. In a worst-case scenario, the price of stocks and bonds would plunge and interest rates would surge.
The value of the dollar would sink, raising the price of goods coming into the U.S. from abroad and giving U.S. companies more leeway to raise their own prices, thus fanning inflation.
That would present Bernanke with a weak economy and rising inflation -- and conflicting remedies. An ailing economy normally is helped by lower interest rates; higher rates curb inflation.
--Energy prices. Hurricane Katrina offered vivid evidence of just how quickly prices can soar. After the hurricane, which knocked out crucial oil and gas facilities in the Gulf Coast, oil prices topped $70 a barrel and gasoline prices rose above $3 a gallon.
Surging energy prices can crimp consumer spending, employment and overall economic activity, and lead to higher inflation if businesses pass along their higher costs to customers.
Surveying those potential hot spots, economists have little doubt that Bernanke has the intellect for the job.
"I'd bet on Ben's ability to see what was coming around the next corner over just about anybody else," said Robert Frank, a Cornell University economics professor who wrote a textbook with Bernanke.
Bernanke taught himself calculus in high school. He scored 1,590 out of a possible 1,600 on his SAT. He graduated from Harvard with an economics degree and added a doctorate in economics from the Massachusetts Institute of Technology.
He has spent most of his professional life in academia, including 17 years teaching at Princeton, where he headed the economics department.
"If he could get consensus on controversial matters at an academic department full of superstars, I think that's a real good sign" for how he will do as Fed chief, Frank said.
Bernanke left Princeton to become a governor at the Federal Reserve Board, working with Greenspan for nearly three years. Bernanke then went on to be chairman of the White House's Council of Economic Advisers. His nomination to be Fed chief is awaiting Senate approval, which is expected.
Greenspan, 79, had a distinguished career as an economic forecaster before he went to the Fed. He had a sixth sense about Wall Street's psyche and a mastery of politics that enabled him to maneuver through Republican and Democratic administrations and congressional grillings, and build consensus among his Fed colleagues.
Bernanke will be tested in these areas.
He did not work on Wall Street and has had limited political experience. Winning support at the Fed and earning credibility with financial and political players outside the central bank will go a long way in determining the success of the Bernanke Fed.
"To establish some credibility with the markets, that is really half the game," said Nelson Mark, economics professor at the University of Notre Dame.
Bernanke's interest in seeing the Fed adopt an "inflation target" -- numerically spelling out the acceptable bounds for inflation -- also will test his political and leadership skills, analysts said. Bernanke see this initiative as a way to help demystify the Fed and improve communications with investors and the public.
It also will be important for Bernanke to have good relations with his central bank counterparts in other countries. The financial crises in Asia in 1997 that spread to Russia and Brazil are a sobering reminder of this need.
And, of course, there is the daunting challenge of taking over for Greenspan, who has been referred to as the maestro, the second-most important person in Washington and the greatest central banker ever.
"Anytime you follow a legend, even if you are spectacularly successful yourself, you are apt to seem you are coming up a little short," said Stephen Buser, professor emeritus of finance at Ohio State University.
The plain-speaking Bernanke must figure out whether clarity is always the best. Greenspan could be clear when he wanted to, but his Delphic discourse is fabled.
Greenspan weighed in on a range of issues -- President Bush's tax cuts, for example -- and sometimes caught flak for it. "Bernanke will have to determine what issues are off and on limits," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.
Bernanke has said he will not take a public stand on specific tax or spending proposals before Congress.
As a respected economist with sterling academic credentials, Bernanke could find that "his greatest challenge may be living up to his own reputation," Swonk said.