Bernanke May Not Stay in Office to See Fruits of His Labour
There’s a possibility Obama is grooming Summers to replace the Fed chief
Reuters 19 December 2008
(WASHINGTON) The fruits of Federal Reserve chairman Ben Bernanke’s aggressive and unprecedented moves to fight off a major US recession may come too late to cement his legacy and ensure him a second term.
Mr. Bernanke gets high grades from many analysts for recognising relatively quickly that the credit crunch spreading from defaulting mortgages to banks to businesses could have broader impact, and for taking bold measures in response.
‘Once Bernanke realised how serious and severe his problem was, he moved quickly, and he moved aggressively,’ said Bernard Baumohl, of the Economic Outlook Group in Princeton Junction, New Jersey.
In a Reuters poll, economists said the US central bank chief was early to acknowledge the scale of the crisis, especially when compared to his counterparts in Europe and Japan, and they gave his performance high marks.
Mr. Bernanke looked prescient compared with European Central Bank president Jean-Claude Trichet who in July worried enough about inflation to raise rates, only to reverse direction three months later when the financial crisis intensified.
Perhaps no one has been better equipped to handle the crisis than Mr. Bernanke, who studied how central bank complacency in the 1920s set the stage for the Great Depression, and whose speeches in 2002 and 2004 laid out a detailed map for monetary policy when a central bank’s interest rate drops to zero.
On Monday, the Fed pushed on into uncharted terrain, dropping its benchmark interest rate to a range at or near zero for the first time and promising to keep rates low for a long time.
The central bank went further, promising to use untested weapons to boost growth as its conventional ammunition was spent. Mr. Bernanke opened the door to expand purchases of debt issued and guaranteed by government-sponsored mortgage agencies and to buying longer-dated Treasury securities.
The response in markets was largely positive, with a rally in stocks on Tuesday, albeit followed by a fall on Wednesday, and a tumble in yields on longer- dated Treasury debt.
Mr. Bernanke has said the Fed is willing to bypass banks and directly provide funding to specific market areas where activity has stalled, including consumer and small business loans. Commercial real estate may follow.
The Fed’s moves are likely to foster private sector risk-taking and lead to appreciation of asset prices, fuelling a recovery, said Zach Pandl, an economist with Barclays Capital.
‘Our view is that these policies will gain traction,’ he said. ‘We’ve been impressed with the speed and scale, and the Fed has rarely been behind the curve. We think they’ve been creative, nondogmatic.’
However, there is the possibility that the Fed’s actions could backfire since the rate cut has lowered the value of the US dollar, and other countries may try to lower the value of their currencies to make them more stable, said Richard Bove, an analyst for Ladenburg Thalmann.
In addition, the Fed’s rate cuts have failed to lower some private sector borrowing costs, Mr. Bove said. ‘The Fed is not impacting the private sector,’ he said in a note to clients.
But most economists don’t expect the economy to show signs of rebounding until the second half of next year.
Unemployment rates, which lag an economic recovery, may be peaking next autumn, right around the time the administration of current President-elect Barack Obama needs to announce whether they want Mr. Bernanke to stay on for a second four-year term.
‘If by fall of 2009 there’s no improvement in the economy, and indeed, if it’s even worse, I can see case being made for replacing the chairman of the Federal Reserve,’ said Campbell Harvey, a professor at Duke University’s Fuqua School of Business. ‘Politically, you would have to shake the team up.’
Mr. Bernanke’s detractors also point to the decision in September to let Lehman Brothers fail as a serious error of judgment. Authorities including Mr. Bernanke have said they could not find a buyer for the investment bank, but the event was seen as triggering an acceleration of the economic downturn.
Mr. Obama’s naming of former Treasury secretary Lawrence Summers, a highly regarded economist, to a senior White House economics coordination post also raises the possibility that the President-elect is grooming him to replace Mr. Bernanke.
1 comment:
Bernanke May Not Stay in Office to See Fruits of His Labour
There’s a possibility Obama is grooming Summers to replace the Fed chief
Reuters
19 December 2008
(WASHINGTON) The fruits of Federal Reserve chairman Ben Bernanke’s aggressive and unprecedented moves to fight off a major US recession may come too late to cement his legacy and ensure him a second term.
Mr. Bernanke gets high grades from many analysts for recognising relatively quickly that the credit crunch spreading from defaulting mortgages to banks to businesses could have broader impact, and for taking bold measures in response.
‘Once Bernanke realised how serious and severe his problem was, he moved quickly, and he moved aggressively,’ said Bernard Baumohl, of the Economic Outlook Group in Princeton Junction, New Jersey.
In a Reuters poll, economists said the US central bank chief was early to acknowledge the scale of the crisis, especially when compared to his counterparts in Europe and Japan, and they gave his performance high marks.
Mr. Bernanke looked prescient compared with European Central Bank president Jean-Claude Trichet who in July worried enough about inflation to raise rates, only to reverse direction three months later when the financial crisis intensified.
Perhaps no one has been better equipped to handle the crisis than Mr. Bernanke, who studied how central bank complacency in the 1920s set the stage for the Great Depression, and whose speeches in 2002 and 2004 laid out a detailed map for monetary policy when a central bank’s interest rate drops to zero.
On Monday, the Fed pushed on into uncharted terrain, dropping its benchmark interest rate to a range at or near zero for the first time and promising to keep rates low for a long time.
The central bank went further, promising to use untested weapons to boost growth as its conventional ammunition was spent. Mr. Bernanke opened the door to expand purchases of debt issued and guaranteed by government-sponsored mortgage agencies and to buying longer-dated Treasury securities.
The response in markets was largely positive, with a rally in stocks on Tuesday, albeit followed by a fall on Wednesday, and a tumble in yields on longer- dated Treasury debt.
Mr. Bernanke has said the Fed is willing to bypass banks and directly provide funding to specific market areas where activity has stalled, including consumer and small business loans. Commercial real estate may follow.
The Fed’s moves are likely to foster private sector risk-taking and lead to appreciation of asset prices, fuelling a recovery, said Zach Pandl, an economist with Barclays Capital.
‘Our view is that these policies will gain traction,’ he said. ‘We’ve been impressed with the speed and scale, and the Fed has rarely been behind the curve. We think they’ve been creative, nondogmatic.’
However, there is the possibility that the Fed’s actions could backfire since the rate cut has lowered the value of the US dollar, and other countries may try to lower the value of their currencies to make them more stable, said Richard Bove, an analyst for Ladenburg Thalmann.
In addition, the Fed’s rate cuts have failed to lower some private sector borrowing costs, Mr. Bove said. ‘The Fed is not impacting the private sector,’ he said in a note to clients.
But most economists don’t expect the economy to show signs of rebounding until the second half of next year.
Unemployment rates, which lag an economic recovery, may be peaking next autumn, right around the time the administration of current President-elect Barack Obama needs to announce whether they want Mr. Bernanke to stay on for a second four-year term.
‘If by fall of 2009 there’s no improvement in the economy, and indeed, if it’s even worse, I can see case being made for replacing the chairman of the Federal Reserve,’ said Campbell Harvey, a professor at Duke University’s Fuqua School of Business. ‘Politically, you would have to shake the team up.’
Mr. Bernanke’s detractors also point to the decision in September to let Lehman Brothers fail as a serious error of judgment. Authorities including Mr. Bernanke have said they could not find a buyer for the investment bank, but the event was seen as triggering an acceleration of the economic downturn.
Mr. Obama’s naming of former Treasury secretary Lawrence Summers, a highly regarded economist, to a senior White House economics coordination post also raises the possibility that the President-elect is grooming him to replace Mr. Bernanke.
Post a Comment