Another Term for Bernanke as Fed Chairman?
The assumption around Washington is that Federal Reserve Chairman Ben Bernanke will have exited by the time his current term ends on Jan. 31, and the speculation focuses on who will replace him.
Not so fast. His departure isn't a done deal. "I wouldn't write off another term," says veteran Fed watcher Diane Swonk, chief economist with Mesirow Financial.
A shift at the Fed's helm would be a big deal. Anyone who bought a house or refinanced during the past three years got historically low interest rates, thanks to Bernanke's assessment that a healthy economy needs a strong recovery in housing. And Bernanke is committed to keeping rates low until the unemployment rate declines much more. The next central bank chairman, on the other hand, could quickly reverse Bernanke's aggressive low-interest-rate policy.
There are a variety of compelling reasons why Bernanke would want to make a graceful exit soon. Among them is the increased hostility he's getting from members of Congress. They don't seem to give him credit for launching policies that averted another Great Depression.
At a Senate Banking Committee hearing in late February, for example, Sen. Bob Corker (R-TN) said that the Fed is creating a "faux wealth effect" with rising stock prices juiced by easy credit. For good measure, Corker also argued that Bernanke's policies are promoting a currency war, and added that keeping interest rates so low hurts those who save and is "throwing seniors under the bus." Bernanke showed his frustration, challenging Corker's comments. The central bank boss told the senator, "None of the things you said are true."
And it's not just Republicans carping. Bernanke drew criticism from Democrats as well. Newcomer Sen. Elizabeth Warren (D-MA), for instance, criticized him and the Fed for favoring big banks and crafting policy that will bail banks out if they get in serious financial trouble again.
Who needs all that? Bernanke showed great imagination in taking actions that prevented the deep recession from getting worse. "Whatever it takes," became his battle cry as he led the Fed to help shore up financial institutions in the U.S. and Europe, well outside the traditional purview of the central bank. Moreover, the Fed took steps without historical precedent (his critics describe the policies as "hysterical precedent") — among them, announcing that interest rates would stay at rock bottom until the unemployment rate descended to 6.5%. With unemployment currently at 7.9%, the decline might take two or three more years.
Now that the crisis has passed, the critics are becoming more numerous and more outspoken. And they now include members of the Fed's policy panel, the Federal Open Market Committee.
So why not retire and bet that history will render a favorable verdict? Swonk says it is an eye on history that may persuade Bernanke to seek another term. "Legacy," Swonk says. "He could want to stay until the job is finished," meaning until the economy grows enough to bring the jobless rate to near 6.5%, and then showing his critics that the Fed can unwind its holdings of billions worth of Treasury bonds and mortgage-backed bonds without sparking a surge of inflation.
Bernanke may want that chance, but another Fed watcher, Stuart Hoffman, chief economist with PNC Financial, says President Obama may not give Bernanke the choice. Although Bernanke was reappointed to the Federal Reserve Board by Obama in 2010, he was originally appointed by President George W. Bush in 2006. The White House may want to put in place someone with only the Obama stamp, though it would have to be someone who both echoes Bernanke's views on stimulating economic growth through rock-bottom interest rates and won't rattle the financial markets. As it happens, there is such a person close at hand: Fed Vice Chairman Janet Yellen, who was named to the board by Obama in 2010. And as a plus for the diversity-minded president, Yellen would be the first woman to head the board since its creation in 1914.
Whoever is in charge of monetary policy come 2014 will have an epic challenge: withdrawing stimulus while maintaining low inflation. As former Fed Chairman Paul Volcker told a room full of business economists in early March: "That's the crucial challenge [the Fed chairman] faces. And history shows that the Federal Reserve is usually too slow to act."