Posted: August 30, 2009
Obama makes the right call with the Fed chief's reappointmentJeff Thredgold
President Obama made a solid choice yesterday to reappoint current Federal Reserve Chairman Ben Bernanke to a second four-year term. His initial four-year appointment by then-President Bush expires on Jan. 31, 2010.
We noted in our Tea Leaf issue dated July 29 that reappointing Bernanke would be a wise choice. His reappointment was also supported by roughly 90 percent of forecasting economists. Changing horses in mid-stream is not usually a good idea, especially given the depth, slippery rocks and icy temperatures that “Captain” Bernanke is currently steering the economy through.
The President noted that Bernanke “has led the Fed through one of the worst financial crises that this nation and this world have ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage and his creativity, that’s exactly what he has helped to achieve.”
The Fed Chairman thanked the President for his “unwavering support for a strong and independent Federal Reserve.” Bernanke pledged “to help provide a solid foundation for growth and prosperity in an environment of price stability.”
This reappointment, as well as Bernnake’s use of key terminology, was critically important because of the tough course that is yet to be followed by the Fed. At some point, the Fed will begin to withdraw much of the temporary monetary stimulus that has helped to stabilize the economy and financial markets.
These moves will be more of a two-step process than ever before. Unprecedented moves by the Fed, grouped under the banner of “quantitative easing,” have been undertaken during the past two years to help domestic and global financial markets return to some level of normalcy.
Many of these moves have had the desired effect. Other markets remain more limited in scope and volume, requiring a continued Fed participation.
More public will be the Fed’s first moves, expected by most forecasters sometime during mid-2010, to increase the federal funds rate from the record low target level of 0.00 to 0.25 percent, which has been in place since mid-December 2008.
A possible series of modest tightening moves next year could draw strong Congressional criticism as it pushes financing costs higher. The Congress would make the case that the “Fed is taking the punch bowl away from the party just when the party in getting going.”
Come to think of it, the Congress ALWAYS complains when the Fed is pushing its key interest rate higher. Such moves could also draw criticism from the Administration, although such views would likely be expressed behind closed doors.
At this same time of rising tensions between the Fed and our illustrious elected representatives, Bernanke is very likely to be increasingly critical of the enormous budget deficits now expected. He will make it clear that deficits of roughly $1 trillion annually during the next decade are simply not affordable and would do great damage to this nation.