Fed chairman and his stimulus on the way out
You know your job security is shaky when the chief executive announces on national television that you’ve stayed too long. That’s especially true when the chief executive is president of the United States. President Barack Obama made his comments about Federal Reserve Chairman Ben Bernanke in a PBS interview last week. Bernanke has stayed “a lot longer than he wanted to or he was supposed to,” Obama said.
On Wednesday, Bernanke announced that the Fed expects to scale back its main economic stimulus program later this year and end it around the middle of next year.
Put the two developments together, and it looks like the days are numbered for the Fed’s chairman and for the bond-buying program that he has resolutely championed. The time has come for the U.S. economy and financial markets to prepare for a tricky transition from a long period of easy money under Bernanke.
A new approach is overdue. The Fed needs to shift away from Bernanke’s perpetual state of crisis management. Whether Obama taps FedViceChairJanetYellenoroneofthemany other candidates being touted as Bernanke’s successor, it’s a good time for a change. Bernanke’s second four-year term ends Jan. 31.
Bernanke deserves credit for his starring role in rescuing the economy from disaster during the financial meltdown of 200809. He also has served the public interest by calling out Congress for its failure to reform a broken federal tax system or to put entitlement spending on a sustainable track.
But lately Bernanke has worried us with his commitment to pouring new money into an economy that has been growing, albeit sluggishly, for years now. The Fed’s latest bond-buying program, known as QE3, has succeeded in suppressing long-term interest rates. But the cost of such a heavy-handed policy has yet to be reckoned with.
Bernanke’s Fed has expanded its balance sheet to a bloated $3.4 trillion and counting, up from $877 billion in pre-crisis 2007. It is still buying $45 billion in Treasuries and $40 billion in mortgage-backed securities every month.
Perhaps sooner than it anticipates, the Fed will be compelled by inflationary pressures to stop buying bonds. Eventually it will need to reverse course, selling the assets it has acquired. That action is likely to boost interest rates, slow the economy and potentially put the brakes on a stock market that has raced ahead this year.
The markets reacted negatively Wednesday to all the Fed news. Taking away the punch bowl is no way to win popular acclaim. But if Bernanke won’t do it, his successor will have to. Bernanke acknowledged as much at a news conference this year, conceding, “I don’t think that I’m the only person in the world who can manage the exit.” Let’s hope not, since it looks like Bernanke won’t be around to manage anything for too much longer. Bernanke declined to comment Wednesday on his “personal plans.”
Meantime, Bernanke & Co. evidently will keep the stimulus flowing until further notice, or until the Fed chairman gives his notice — whichever comes first.