A surging stock market on Monday suggested rousing approval on Wall Street of President Bush's choice of Ben S. Bernanke to head the Federal Reserve.
But for investors and consumers, the choice of a successor for Alan Greenspan still leaves open the big questions of Fed policy: How much higher will the central bank raise interest rates, and how long will it keep them up?
If approved by the Senate, Bernanke, chairman of the White House's Council of Economic Advisors, would step into the Fed's top post at what could be a crucial moment: For the first time in more than a decade, inflation worries are mounting, largely because of the surge in energy costs.
The Fed may have to choose between strong economic growth and stamping out inflation by tightening credit more significantly than it already has. The Fed has raised its key short-term rate 11 times since June 2004, to a four-year high of 3.75%.
And just as Greenspan faced a raging stock market when he took over the Fed in the summer of 1987, Bernanke would have to deal with a red-hot housing market that could be snuffed out by higher interest rates.
Bernanke "is going to be immediately tested," said Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, one of the world's biggest bond investors.
For owners of fixed-rate bonds, inflation is public enemy No. 1. And the bond market's reaction to Bernanke's nomination on Monday was notably cooler than that of the stock market, where the Dow Jones industrial average jumped 169.78 points, or 1.7%, to 10,385.00, the largest one-day gain since April.
The 10-year Treasury note yield, a benchmark for mortgage rates, climbed to 4.45% from 4.38% on Friday. Investors often demand higher yields on bonds when they're worried about rising inflation.
Bernanke's image on Wall Street has been largely shaped by comments he made in November 2002, in what's now known as the "helicopter speech." In that address, Bernanke, then a Fed governor, focused on the risk that the then-struggling economy could fall into deflation, meaning a downward spiral of prices and wages.
Bernanke detailed how the Fed could use its various tools to spur consumer and business spending, including by jumping into the bond market to directly buy Treasury securities in an effort to push down longer-term interest rates. Combined with federal tax cuts, he said, the effect would be a "helicopter drop" of money into the economy -- a phrase coined by eminent economist Milton Friedman.
