By Rick Glaze

Friday’s positive GDP report showed the economy grew 3.8% in the third quarter, giving investors the catalyst necessary to get back into the markets and push the major indexes up. The Dow shot up 172 points to close at 10,402, the Nasdaq rallied 26 points to close at 2,089 and the S&P500 ended the week at 1,198, a 19-point increase.

As reported last week, President Bush nominated a new Federal Reserve Bank chairman. More information and analysis has been done to help understand what is in store for the nation’s monetary control system if the U.S. Senate confirms the nomination.

Nominee Ben Bernanke is an expert on monetary policy; previous chairmen have had a microeconomics expertise. Bernanke has also been labeled a “dove,” which means his priorities are economic growth and inflation. Clearly, these two factors are related, and they have been a part of outgoing chairman Alan Greenspan’s strategy for the last decade.

Currently, for example, short rates are being raised to slow the economic growth that prompts higher inflation. Bernanke believes in “pegging inflation” and manipulating monetary policy around the “peg.” The question is: How will Bernanke judge inflation? Variables include the consumer price index and the producer price index.

Inflation has been described as a hidden tax, and its regulation is vitally important. Greenspan became a master at using the press to threaten interest rates up or down. By signaling his intentions, Greenspan scared the markets into action. This tactic may sound unusual, unscientific or even weird, but it worked to benefit all.

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Rick Glaze is president of Glaze Capital Management of Los Altos and a registered representative offering securities through First Allied Securities.