In an interview with Charlie Rose, and in a response to a question about appointing Ben Bernanke to another term as Chairman of the Board of Governors of the Federal Reserve System, "President Barack Obama said Federal Reserve Chairman Ben S. Bernanke has stayed in his post 'longer than he wanted,'' one of the clearest signals the central bank chief will leave when his current term expires next year. This according to Craig Torres and Rich Miller in Bloomberg.
"Ben Bernanke's done an outstanding job," Obama said. "He's already stayed a lot longer than he wanted or he was supposed to." Bernanke just became a lame-duck!
And, the next chairperson, (getting prepared for the possibility that Janet Yellen would be appointed as the next head of the Fed) would need to be chosen by January 31, 2014.
The question that immediately comes to my mind concerns the future of the Fed's bond buying program. If Ben Bernanke is to leave the Federal Reserve at the end of his present term, will he place all the responsibility for the Fed's retreat from its current bond-buying program to the next chairperson?
My guess is that he would not. My guess is that he would not want the full responsibility of that action to fall on the head of the new chair-person. This coincides with thoughts that are already in the air.
Robin Harding writes in Financial Times, "Fed Likely to Signal Tapering Move."
"Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85 billion a month in asset purchases when he holds a press conference tomorrow…"
Of course, Harding writes, Bernanke will "balance that by saying subsequent moves depend on what happens to the economy."
But, Bernanke has already given hints about the Fed's easing up on the bond acquisition program. The first of these hints came out in March and started to rattle the bond markets. Other remarks came out in April which many ultimately site as a cause for the drop in the prices of U.S. Treasury securities in May.
As many readers of my posts know, I don't fully subscribe to this reason for the decline in the prices of US Treasury securities during this time. See for example my post of June 12, 2013.
Be that as it may, this interpretation does not conflict with the possibility that Ben Bernanke wants to start the process of lower monthly bond purchases before he leaves the Chairman position and he wants to do it soon enough to oversee the slowing down of purchases so that any "kinks" in the move can be worked out before he is replaced.
Ben Bernanke led the Federal Reserve into the position of a third round of quantitative easing and I believe that he would really like to start the central bank on the process of withdrawing from this effort before he leaves office.
The thing that would hold him back from following such a path is the state of the economy. Mr. Harding, in the Financial Times piece, believes that the economy is picking up sufficiently to warrant the beginning of such a withdrawal.
"First, the main indicators of the labor market have improved greatly. The Fed's projection for unemployment at the end of 2013 is down from 7.75 percent to 7.4 percent and falling. Average payrolls growth in the past six months has been 194,000 compared with 130,000 in the six months leading up to QE3.
Monthly payrolls have become less volatile. The economy is weathering tax rises and federal spending cuts. Although markets have been slow to acknowledge it, all this looks like a substantial improvement."
In other words, the economic environment is such that reducing the Fed's monthly purchases of Treasury bonds and mortgage-backed securities is not out-of-the-question. But, President Obama's comments and the timing of these comments are quite stunning. They definitely imply that Mr. Bernanke is gone next February. Mr. Bernanke, therefore, becomes a definite "lame-duck".
So, what does the "lame-duck" do his last seven months in office? I was skeptical of the Fed reducing its bond purchases any time soon before the statement of Mr. Obama.
I now believe that the reduction in bond purchases will take place and that Mr. Bernanke will oversee this withdrawal. I still believe that the European situation will have as much or more to do with the direction of yields on longer-term Treasury securities than will the Fed through the end of 2013. But, at least in the very near term, a switch in Federal Reserve direction can disrupt the financial markets and introduce greater volatility.
I believe that Mr. Bernanke's legacy will be hotly debated for a long time. He was a vital part of the Greenspan effort to keep short-term interest rates exceedingly low in the early part of the 2000s. He was in charge as interest rates were pushed too high for too long before the financial market collapse in 2007 and 2008. He was seemingly rattled during the early stages of the financial bailouts. He did things that no central banker has ever done before. And, we still don't have all the results in from the excessive injection of reserves into the banking system.
Whatever the outcome, Mr. Bernanke will not be forgotten in the future debate about how a central bank should act.