Thursday, February 14, 2008

Bernanke's Fate

The Chairman of the Federal Reserve System is one of the most prominent targets of pundits on the planet…even though the public may not show much name recognition. Once again question marks are being raised about the tenure of Ben Bernanke, both for now and in the future. Particularly in times when financial markets are unsettled and there is substantial uncertainty about the future course of the economy, the Fed Chairman becomes the focal point of almost all points of view. This just goes with the job. See for example, “Bernanke’s Fate May Hang on Economy” in the Wall Street Journal (

It is true, as stated by Douglas Holtz-Eakin, economic advisor to John McCain, that the actions of the Fed Chairman can only really be judged in hindsight. Thus, although Alan Greenspan was highly praised for much of his term as the Fed Chairman, he has come under increasing criticism as his leadership has been reviewed since leaving the position. (See for example, Greenspan’s Bubbles, by William Fleckenstein.) Still, close scrutiny of the current Chairman will continue to remain intense.

In terms of real-time operating performance, however, the most important thing a Fed Chairman must possess is trust. And, trust must be earned. Every Fed Chairman comes to the position with the good will of all…even Bill Miller (who?) was wished well when Jimmy Carter appointed him. Being in such a powerful position and being so exposed to the analysts usually means that the trials begin relatively soon for a new Chairman.

One could argue that, up to this point, Bernanke has not earned that trust. It has not helped that he and the Fed made statements that seemingly reversed themselves in the fall within relatively short periods of time, even though the reversals may seem to have been rather small. Also, it seems as if financial market participants were a little unnerved by the January performance of the Fed in which the target for the Federal Funds rate was dropped by 75 basis points, twice in eight days. The bottom line is that people are not seeing consistency in performance and, hence, trust remains elusive, and criticism grows.

Market participants want to trust Bernanke…he needs to give them reason to do so.

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