Reaction to Bernanke's Reappointment
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Jeffrey Kleintop, Chief Market Strategist, LPL Financial
The markets are having a muted reaction this morning to the news because the reappointment of Ben Bernanke was already priced into the markets. Online odds pegged his reappointment probability at 80%. The confidence in his reappointment was likely due to the supportive comments made by the President in recent months and the high marks given Bernanke by the public. Last week, at the LPL Financial national conference, Focus09, thousands of advisers surveyed overwhelmingly gave the Fed chairman a grade of A or B for his handling of the financial crisis.
However, we do know what might have happened if someone else had been nominated by the President. History shows us the reaction can be materially negative for the markets. On June 2, 1987, Reagan nominated [Alan] Greenspan. and the 10-year Treasury yield rose 35 [basis points]—one of the biggest-ever one-day moves. On Oct. 24, 2005, Bush nominated Bernanke and the 10-year Treasury yield rose 20 bps in a few days. A big move in rates to the upside resulting from the uncertainty associated with a new Fed head would be unwelcome. The Treasury is attempting to sell record-breaking amounts of Treasury debt, and the housing market can ill afford higher mortgage rates at the present time.
It is good news that the uncertainty is out of the way and an exit strategy from the extraordinary stimulus provided by the Fed over the past year can be more effectively communicated by the Fed.
Obama said Bernanke "has led the Fed through one of the worst financial crises that this nation and this world have ever faced." Though this appointment still needs Senate confirmation, it's not expected to be difficult. The markets have breathed a sigh of relief on the reappointment, as it removes a lot of uncertainty and means continuity of policy. Although Bernanke has many critics, who else was the President going to call? Any other choice would have been seen to be too politically oriented. Indeed, there has been talk in the market that the Bernanke reappointment was accelerated, and timed for today, to offset the bad news from the budget, with the mid-session review due out today as well. Bernanke's four-year term expires on Jan. 31.
Sean Snaith, director, Institute for Economic Competitiveness, University of Central Florida
Obama's announcement today that he will nominate Ben Bernanke to a second stint as Federal Reserve chairman is "arguably the best move the Administration has made to date," Snaith says in a UCF news release.
"Bernanke has pulled off the economic equivalent of landing a plane in the Hudson River," Snaith says, referring to the January plane crash landing where no one was seriously injured. "He is the Captain Sully of the financial crisis."
With questions about his reappointment aside, Snaith says, Bernanke needs to begin unwinding the massive stimulus that the Federal Reserve has unleashed. He also needs to start tightening monetary policy to prevent inflation from having a chance to take root, Snaith says.
Paul Dales, U.S. economist, Capital Economics
The news that Ben Bernanke has been nominated for a second term as Fed chairman caused few ripples in the markets, mainly as it was largely expected. But at the margins, the news that the deflation-conscious Bernanke is going to be at the helm for another four years provides tentative support to our view that the zero-interest rate policy will remain in place until 2011 at the earliest.
Anthony Sabino, professor of law, business, and economics, St. John's University
What choice did the President have? When the ship is taking on water, do you change the captain?
To be fair, it is not that Bernanke is doing such a bad job with the calamity he inherited from Greenspan's easy-credit policies, but until we are well and truly out of the Great Cleansing (that's what I call the Great Recession), it is impossible to judge how good a job he is doing.
President Obama nominated Chairman Bernanke for a second term at the helm of the Fed, a wise move given the current air of optimism. It will be best to have the Chairmanship locked down in the event of any stimulus let down in the months ahead. We think Chairman Bernanke's second term will be dominated by three challenges. First, he needs to complete his credit easing policies which will include dealing with commercial mortgages and further support for residential mortgages. The second challenge will be to implement a credible exit strategy, which we think will involve an extended period of zero rates, and only gradual reductions in the balance sheet. Third, Chairman Bernanke must maintain a prominent, and independent role for the Fed through financial regulation overhaul. We think the academic in Bernanke also relishes the opportunity to chair the Fed at one of the most pivotal moments in macroeconomics.
Peter Schiff, President, Euro Pacific Capital
President Obama's decision to re-appoint Ben Bernanke is a practice in rewarding failure. 'Helicopter Ben' was the chief architect of the Fed's easy money policy under Chairman Greenspan, which created the housing bubble. As Chairman himself, Bernanke is acclaimed for avoiding a steep financial collapse when that bubble burst. While he may have eased our descent, the cost will be a major currency crisis which undermines what remains of our economy. He should enjoy his current popularity, because history will be a harsher judge.