Around the Street June 23, 2009, 3:24PM EST

The Fed: It's Not Easy Being Ben

Market experts weigh in on Fed Chairman Bernanke's prospects for reappointment, the housing market, and other topics

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By BusinessWeek Staff

Imagine having your boss talk publicly about your job standing at the same time you're having one of your most important staff meetings of the year. For Federal Reserve Chairman Ben Bernanke, it's all in a day's work. The Fed chief was ensconced with other members of the Federal Open Market Committee on June 23 in the first day of a two-day policy meeting. The Fed is expected to leave interest rates unchanged at the conclusion of the meeting on June 24.

But the FOMC meeting, normally a signal event for financial markets, was not the only reason investors were chattering about the central bank on June 23. At a press conference, President Barack Obama appeared to offer only a lukewarm endorsement of the Fed chief as questions swirl about Bernanke's reappointment. (His term expires Jan. 31.)

To add to the fun, Bernanke faces a congressional hearing later this week on the Fed's actions to aid Bank of America's (BAC) takeover of Merrill Lynch.

What do market experts have to say about the Bernanke situation, the housing market, corporate taxes, and other topics? Here, BusinessWeek features comments from Wall Street economists and strategists:

Action Economics

President Obama said he would "not make news" on Fed Chairman Bernanke's reappointment, in answering reporters' questions after his speech. Obama said the Fed chief has done a "fine job" under difficult circumstances, but he qualified that by saying all regulators fell short and the Fed didn't do all that was necessary to anticipate systemic risk. The Administration's recent proposals on regulatory reform are focused on what the Fed needs to do in the future. Although Bernanke's tenure as chairman isn't up until next January, there's already been considerable speculation on his reappointment, with many believing Larry Summers (National Economic Council director) could get the nod, particularly if the economic recovery fizzles.

President Obama didn't give anything away regarding his decision on Bernanke, but his support was less than enthusiastic.

Ted Wieseman, Morgan Stanley

As expected, home sales showed a bit more upside in May, rising 2.4%, to a 4.77 million-unit annual rate. This was a seven-month high, but sales have been pretty stable near 12-year lows since the end of last year—a trend that will be significantly challenged after the spike in mortgage rates that began in late May. In other data, the composite Richmond Fed manufacturing index ticked up to 6 in June from 4 in May, consistent with our preliminary forecast for a small further improvement in the national ISM [manufacturing index] to 43.5 from 42.8. The FHFA house price index dipped 0.1% in April for a 7% year-over-year drop. Prices for homes financed with conventional mortgages appear to be holding up much better than the overall market, though these numbers are still somewhat hard to believe.

Edward Yardeni, Yardeni Research

Several CEOs of major U.S. manufacturing companies were melancholy during a recent dinner in Washington, D.C. Their concern was that while they've been scrambling to cut their costs, the government is working just as fast to increase their costs. A few told me that they might have to consider scrambling their headquarters out of the U.S. Last December, Weatherford International (WFT) said it would forsake the pink sand beaches of Bermuda, where it's been domiciled since 2002, to set up shop in Switzerland. Transocean (RIG), domiciled in the Cayman Islands, made a similar announcement in October. Nationally, Weatherford and Transocean are joined by the likes of Tyco (TEL) and Foster Wheeler (FWLT).

By moving their headquarters, the companies are preserving tax benefits of being domiciled outside the U.S. Many of those benefits may go away if the Obama Administration follows through on plans to shut down corporate tax loopholes. Bermuda has no corporate income tax, which drew companies there. Switzerland has a corporate income tax but doesn't levy it on profits from subsidiaries that operate outside the country, and it's less likely to have those tax advantages eliminated by reform measures.

Alec Phillips, Goldman Sachs

The expiration of several important stimulus provisions in 2010, combined with the expiration of the 2001 and 2003 tax cuts at the end of that year, threaten to become a serious drag on growth in late 2010 and into 2011. However, lawmakers are under increasing pressure to show fiscal restraint and appear to have little appetite for another large stimulus package. That said, we expect fiscal policy to provide some additional support for the economy in 2010 and to constitute less of a drag on growth in 2011 than is currently embodied in law.

In all, we expect the extension of some expiring programs like unemployment insurance, as well as incremental spending in other areas, to bring the fiscal impulse in 2010 up slightly to around 0.75% of gross domestic product. In 2011, current policy would create a drag of around 2.5% of GDP; we expect Congress to fill roughly half of that hole, but suspect it will be difficult to avoid fiscal restraint of at least around 1%.