Bernanke's inflation approach could create a bullish market

There is no doubt that Ben Bernanke, as chairman of the Federal Reserve, would continue the Fed's commitment to controlling inflation, but his methods may be more likely to turn the stock market bullish.

Unlike during the 1960s and 1970s when many central bankers thought that inflation did little harm and that controlling inflation caused unnecessary economic pain, the central belief today is that inflation must be controlled. The only question is how.

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Current Fed Chair-man Alan Greenspan is fighting a pre-emptive battle against the possibility of inflation rising after he leaves his job. He believes that once the ugly head of the inflation dragon appears, it's too late to begin the battle, and at that point, only dramatic economic moves can control it.

Therefore, Green-span's approach is to raise interest rates slightly over time, signaling the intent to control inflation. This strategy has resulted in 12 increases in the Fed rate of a quarter point each, moving the short-term rate from 1 percent to 4 percent.

So far, Bernanke has made two significant remarks. The first is that he wants the Federal Reserve statements to be easily understood, which means no more spending hours debating the true meaning of "Greenspanese." Second, he believes the Federal Reserve should establish "inflation targets so that the Fed can be measured."

There is much debate about whether the inflation target Bernanke has in mind is 1.5 percent to 2.5 percent or 1.5 percent to 2 percent or more, but that misses the real importance of the statement.

While Greenspan's strategy has been to fight an inflation monster that hasn't yet shown its head, Bernanke believes in setting an inflation target and attacking it when it is greater than the target.

I believe Greenspan will raise interest rates by a quarter point in each of the two meetings he has left as Federal Reserve chairman to make sure his fortification is high enough to protect the economy.

It is likely that Bernanke's reasoning will result in no increase in interest rates until inflation approaches his target.

If short-term interest rates are going to rise in December and January to a top rate of 4.5 percent, and if our reading of Bernanke's approval is correct, then interest rates will stay at that level.

With interest rates stable, the stock market would have good reason to turn bullish.