Fed’s monetary course hard to undo
Bernanke’s second four-year term as chairman ending
WASHINGTON — The Federal Reserve under Chairman Ben Bernanke has committed itself to a monetary strategy for this year and beyond that will be difficult to undo under a new chairman.
Under Bernanke’s leadership, the Fed has set out clear markers for the conditions that need to be met to moderate and eventually end its asset-purchase program and then begin increasing interest rates. As a consequence, the identity of the chairman next year is unlikely to matter as much as in the past.
“Usually, the Fed chairman comes in with a clean slate to do whatever they want,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former researcher with the central bank. “Whoever comes in this time is going to inherit a pretty rigid structure.”
Bernanke’s second four-year term as chairman ends Jan. 31. While neither he nor the White House has said definitively that he’ll step down, President Barack Obama suggested just that in a television interview last week, saying the Fed chief had stayed in his post “longer than he wanted.”
Bernanke has tried to make the policymaking Federal Open Market Committee more transparent and democratic. By de-emphasizing the role of the chairman in the committee’s deliberations, he has made it harder for his successor to change the course of policy, said Roberto Perli, a former Fed official who is now a partner at Cornerstone Macro LP in Washington.
“The FOMC under a potential new chair would be largely the same as the current one, and it is unlikely that FOMC members would relinquish their authority or renege on their own policy commitments simply because a new chair may have different views,” Perli wrote in a June 19 note to clients.
Assuming Bernanke is leaving the Fed, Obama probably will want to name someone whose views are not all that different. In a television interview with Charlie Rose, the president said the Fed chairman has done “an outstanding job.”
“I’d be quite surprised if the president nominated a chairman who wasn’t broadly in agreement with the policies that the current chairman has led on the committee — an emphasis on getting the unemployment rate down and having economic activity be stronger, an emphasis on communication and transparency,” former Fed Vice Chairman Donald Kohn said in an interview in Bloomberg’s Washington bureau.
A leading contender to replace Bernanke is the current vice chairwoman, Janet Yellen, who led a subcommittee on the FOMC that focused on devising the central bank’s communications strategy. Since Yellen helped forge the policies, she’d probably be inclined to continue them, said Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities Inc. in New York.
“My guess is the next person is Janet Yellen, and she seems to be very comfortable going along with the policies to date,” said LaVorgna, a former economist at the New York Fed. “I imagine the transition, whoever it is, but likely her, being very seamless.”
In a June 19-20 Bloomberg survey, economists assigned Yellen a 65 percent probability of taking over the top job once Bernanke’s term ends. Timothy Geithner, a former Treasury secretary and former New York Fed president who worked closely with Bernanke in both those posts, was seen as the second most likely successor, with odds of 10 percent.
The next Fed chairman will be “inheriting the last vestiges of the current policy regime,” said Eric Green, the global head of rates, foreign exchange and commodities research at TD Securities Inc. in New York. “Basically they’re not going to have a lot to do that first year.”
That will change after asset purchases end and the Fed prepares to start raising its benchmark interest rate, said Green, another former economist at the New York Fed. Then, the FOMC “will have an opportunity to completely define the ensuing regime — the rate tightening regime.”
The Fed has tried to spell out how it will adjust policy in the future partly out of necessity. With short-term interest rates already effectively at zero, it can’t lower them further to promote growth. Instead, the Fed has used asset purchases and more open communication — promising, in effect, to keep short-term rates lower for longer — to try to achieve that goal.
“Particularly when you’re in unconventional policy mode, talking about the future and how the Fed might react under certain circumstances is critical,” said Kohn, who is now a senior fellow at the Brookings Institution in Washington.
“One of the main thrusts of the Bernanke chairmanship is to help explain as best as the Federal Reserve could what their reaction function is,” he added.