What Else to Watch at the Fed

As the markets intensely scrutinizes the upcoming FOMC statement, I will instead be watching for Obama’s statement on the appointment of the new Federal Reserve chair in the days to come as a far more important clue to long-term market direction.

Currently, intrade shows Bernanke to be the front-runner to be re-appointed as Fed Chairman when his term expires in January 2010. The fate of Helicopter Ben will be an important clue to future policy.

Where is Paul Volcker?
Remember the stories during the campaign about how Paul Volcker added gravitas to the Obama economic team? As Obama became president, Volcker’s voice seemed to get downgraded.

Given Volcker’s age, it is highly unlikely that he would be the next Fed chair. However, with the yield curve steeply upward sloping and inflationary expectations elevated, this may be an appropriate time to consider reducing the level of monetary stimulus.



It would take a “damned the torpedoes” Volcker clone to be brave enough to take away the punch bowl just as the party is starting to get going, especially in the face of severe political pressures and sensitivities.

If Bernanke is re-appointed, then it will be a definite signal to take a ride on the commodity train.

Comments

[whidbey:]

The Fed has an internal balancing act which is problem number one: The Fed's balance sheet seems to be a mess of many things, the value of which is questionable. And audit is needed. The Fed owns a lot of plain junk.

Secondly, there is a real issue of how much can or should be allocated to Treasury purchases to hold the curve in range. If this one is not pursued housing is still a black hole. It it is pursed the over liquidity will rage on.

This is an almost impossible to plan. There seems to be no clear path back from stimulus and the draw-down on liquidity.

Jun 24 08:17 PM

[Moon Kil Woong:]

I suppose "common train" means the American impoverishment plan. There is a crash in 2009, it's called the long term treasury crash. If Bernake keeps debasing the dollar 2010 could easily turn out to be the finishing touches of what he started in 2009. This would make next year the the year of the great dollar crash. Is this what we call a triple hitter? If so, I don't want to see what Bernake considers a home run.

They say that the Aztecs believed everything ends in 2012. Maybe they were just talking about the US economy.

Jun 24 09:13 PM