Common Sense: Uncertainty at the Fed as Markets Oscillate

“He’s already stayed a lot longer than he wanted or he was supposed to,” President Obama told Charlie Rose in an interview that was broadcast on June 17 on Bloomberg TV, all but confirming that he wouldn’t reappoint Mr. Bernanke when his term expires at the end of this year.

The best the president could muster was that Mr. Bernanke was an “outstanding partner along with the White House” in warding off “what could have been an economic crisis of epic proportions.”

A White House spokesman said Mr. Obama meant that as praise, but supporters of the chairman, and even many who have disagreed with him on policy issues, were quick to question both the timing and substance of the comment.

Not only did the comment come across as faint praise for a long-serving public servant who guided the nation’s monetary policy through a severe crisis, but its timing could also hardly have been worse. Mr. Bernanke was in the midst of important Federal Open Market Committee meetings and that very week began the delicate task of communicating the Fed’s plans to “taper” its latest round of quantitative easing. Markets went into convulsions and interest rates shot up. While no one blames Mr. Obama for that, adding another element of uncertainty about Fed policy may have contributed to the volatility.

Others were critical of the president’s choice of the word “partner” to describe the Fed chairman’s role, since the Federal Reserve is an independent agency overseen by Congress. “Any Fed chairman would bristle at the idea they were a partner with a president,” Senator Bob Corker, the Tennessee Republican who serves on the Senate Banking subcommittee on financial institutions and consumer protection, told me this week. “I can understand why people who want to protect the independence of the Fed would be concerned.”

Others pointed out that the Fed has taken the lead in efforts to stimulate the economy as Congress blocked the White House from further stimulus measures, and thus “partner” overstates the White House’s role in the recovery.

By contrast, although history hasn’t been kind to the legacy of Mr. Bernanke’s predecessor, Alan Greenspan, he received a send-off commensurate with his record five terms of service. The Fed itself announced Mr. Greenspan’s decision to retire, and in late October 2005, President George W. Bush announced his choice of Mr. Bernanke at a White House news conference where he lavished praise on the departing chairman as a “legend” who had “dominated his age like no central banker in history” while Mr. Greenspan looked on. On the same occasion, Mr. Bernanke said Mr. Greenspan “set the standard for excellence in economic policy making.”

With many economists and investors fixated for months on the question of when and how quickly the Fed would curtail its extraordinary efforts to stimulate the economy, Mr. Bernanke’s suggestion, just two days after the president’s comments, that the Fed might taper its bond-buying earlier than expected sent markets reeling. Stocks fell across the globe and interest rates rose, with 10-year Treasuries hitting their highest yields since 2011. The volatility index, which was already rising the week before the president’s remarks, leapt to a new high for the year.

Mr. Obama “instantly made Ben a lame duck before the end of his term,” said one economist, who may be a future candidate for Mr. Bernanke’s position and, like many people I interviewed, asked not to be named. “He undermined his credibility both inside the Fed and in financial markets.” While Mr. Bernanke tried to reassure markets that the Fed would monitor the economy and respond as appropriate, this person said, “Part of the negative reaction in asset prices was because market participants have confidence in Ben, but now he won’t be around to oversee that.”

People close to Mr. Bernanke told me that the chairman took the president’s comments in stride, but said he was concerned about the severe market reaction. “He wouldn’t want to feed stories about this when he’s trying to articulate a complex message about monetary policy,” one adviser said.

The people close to the chairman said he had already told the president he wanted to leave at the end of his term. He is expected to return to teaching and research at Princeton, where he delivered this year’s baccalaureate address. He quipped in the speech that his remarks had “nothing whatsoever to do with interest rates” and observed that life was unpredictable.

This article has been revised to reflect the following correction:

Correction: June 28, 2013

An earlier version of this column misstated the occasion of Mr. Bernanke’s speech at Princeton. It was the baccalaureate service, not the commencement.

Article source: http://www.nytimes.com/2013/06/29/business/unexpected-distraction-makes-bernankes-job-harder.html?partner=rss&emc=rss