Four more years of Bernanke

The biggest news today was that Ben Bernanke was nominated for a second term as chairman of the Federal Reserve. Some may view this as a pat on the back from the President for a job well done, but it may also be a move to remove uncertainty from markets.

After all, it’s difficult to judge how well central bankers have performed until many years afterwards. Former chairman Alan Greenspan, for example, received high praise during the dot-com boom, but is now charged with inflating the credit and asset price bubbles that led to the current global financial crisis.

As for Bernanke, he may be remembered as the brilliant student of the Great Depression who averted another one by pulling every lever (and creating some new ones) at the Fed’s disposal. Of course, it’s possible he will be remembered as the man who tripled the size of the Fed’s balance sheet attempting to support financial institutions and, consequently, sparked inflation and destroyed the dollar.

After slashing interest rates to almost zero and pumping $1 trillion into banking system to unfreeze credit markets, Bernanke and Co. must now tackle the difficult task of soaking up liquidity without disturbing the economic recovery. Is growth part of a sustainable recovery or due to a short-term impact of stimulus? This is the question the Fed must answer.

If they believe it to be part of a sustainable recovery, then it is sensible to implement exit strategies. If not, then it might be appropriate to wait and see whether growth has taken root, which entails greater risks of inflation. The Fed has historically been slow to remove stimulus, but with maybe Bernanke can be more aggressive now that he has a bit more job security.

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Peter J. Lazaroff, Investment Analyst