The Ultimate Judge Of A Federal Reserve Chairman's Success: The Value Of The U.S. Dollar

by: John M. Mason

I have made this assertion before: the ultimate criteria to judge the performance of a Federal Reserve Chairman is what happens to the value of the US dollar during that individual's tenure as the Chairman of the Board of Governors of the Federal Reserve System.

Let me just note, however, at the beginning of this discussion that by this criterion, the Federal Reserve has not performed well over the past fifty years or so. The fixed-exchange rate system in place at the beginning of the 1960s was abandoned on August 15, 1971 due, in large part, to the credit inflation created by the US government and the Federal Reserve System during this decade.

Once the US dollar was allowed to float, the credit inflation of the next forty years or so resulted in a decline in the value of the US dollar by almost 31 percent against other major currencies.

Not a good record of fiscal and monetary management.

If one looks at the individual Fed Chairmen, Ben Bernanke has proven to be the second worst as measured by the decline in the US dollar during his administration. Since Mr. Bernanke took over the Chairman's position, the value of the US dollar has declined by more than 11 percent against other major currencies.

And, this decline took place during the worst economic decline since the Great Depression! Generally during such periods of time the value of the currency tends to rise…or, at worst, stay constant. One can look at the record and see that the value of the US dollar did rise dramatically during the period of the Great Recession, reaching a peak in early March 2009, just several months before the recession was declared at an end, but the value of the US dollar has therefore declined by more than 13 percent since then.

To fill out the record, Mr. Bernanke's performance is not the worst in terms of the other Federal Reserve Chairmen during this time. Alan Greenspan holds that position. The value of the US dollar declined by 16.5 percent during his time as Fed Chairman.

On the other side, there has only been one Fed Chairman who experienced a rise in the value of the US dollar while sitting as the leader of the central bank during this fifty years and that, as you might expect, was Paul Volcker. During Volcker's tenure the value of the US dollar rose by about 6.5 percent.

Currently, the value of the US dollar had been rising up until May 22 when Fed Chairman Bernanke gave testimony in front of Congress and stated, "If we see continued improvement and we have confidence that that is going to be sustained, then we could in the next few meetings take a step down in our pace of purchases."

According to David Wessel, writing in the Wall Street Journal, "Markets, as they often do, ignored the 'if' and the 'could' and freaked out. It was as if he had said the Fed was preparing to make the U.S. economy go cold turkey. The bond market has pushed the yield on 10-year Treasurys, which was 1.6% on May 1, to over 2.1%. Mortgage rates moved higher than they've been in more than a year. The stock market gyrated. Markets all over the world recoiled."

And, the value of the US dollar dropped, according to the Wall Street Journal's Dollar Index, by 4.2 percent from the close on May 22 to the close on June 18.

John Plender writes in the Financial Times that "the US is a potent source of uncertainty" in the currency markets "because of the great tapering debate, relating to whether and when the Federal Reserve will retreat from quantitative easing. As Stephen Lewis of Monument Securities remarks, the fear that the Fed will not taper, or indeed dare not taper, may be as significant a factor in the current malaise as anxiety that it will."

The headline of Plender's article: "It's Hard to Write a Happy Ending to the 'QE' Story."

But, Plender also is concerned about the risk-off, risk-on behavior of global markets in recent times. "This is most visible in currency markets where the absurdity of risk-on, risk-off trading appears to be coming to an end."

I have written recently on this subject: "The Next Known Unknown: Europe."

Plender then states, which I believe is bad news for Bernanke, "that markets are beginning to differentiate more carefully between countries and assets on the basis of fundamental analysis, which is a vast improvement on knee-jerk risk-on, risk-off behavior."

Plender seems to agree with me that "the eurozone still hangs like a dark cloud over the global economy," but the downside remains the main story on the future value of the US dollar.

I believe that Mr. Bernanke's record on the value of the dollar will not turn out to be as bad as that of his predecessor Alan Greenspan, but I do believe that the value of the US dollar will fall further before Mr. Bernanke leaves office.

Yes, Mr. Bernanke may have "saved" the US economy by leading the Federal Reserve in throwing everything it could against the wall to see what would stick. But, when one reviews the whole of his career as Fed Chairman I believe that the judgment of international financial markets will stand. During Mr. Bernanke's tenure as the Chairman of the Board of Governors of the Federal Reserve System, the value of the US dollar declined by more than ten percent. And, this decline occurred in spite of the fact that the value of the US dollar rose dramatically during the period of the Great Recession.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.