There's no surprise on Wall Street about Ben Bernanke's nomination as Federal Reserve chairman, since his name had been floated for the...
NEW YORK — There’s no surprise on Wall Street about Ben Bernanke’s nomination as Federal Reserve chairman, since his name had been floated for the job for months. He has a strong academic background, has served on the Fed board, and spent five months heading President Bush’s economic team.
How all that translates into leadership of the nation’s monetary policy body is unknowable, but Wall Street seemed comfortable Monday with President Bush’s nomination of Bernanke, 51, considered someone who would not divert too much from the course set by longtime Fed Chairman Alan Greenspan.
Wall Street expressed its satisfaction with the pick by sending stocks sharply higher, with the Dow Jones industrial average up nearly 170 points. The bond market moved lower, partly in response to rising stocks and perhaps in part to concerns that Bernanke would be softer on inflation than his predecessor.
“Bernanke is a fairly well-known entity, and his name’s been around for a while in connection with this appointment,” said David Harris, senior vice president for fixed-income at Schroders. “As far as anyone can tell, it’ll be steady as she goes.”
Bernanke also is considered more of a safe bet on Wall Street, less volatile than the other two top choices: Columbia University professor Glenn Hubbard, Bush’s first chairman of the Council of Economic Advisers (CEA); and Harvard economics professor Martin Feldstein, who was CEA chairman during the Reagan administration.
“I think what won out is that Bernanke is a bit closer to the White House than anyone else right now,” said Brian Gardner, Washington analyst with Keefe, Bruyette & Woods. “He’s also very much in the Greenspan mold. It’s a mistake to view this guy as an inflation dove. He almost has to be tough on inflation to make sure he has the market’s confidence.”
Wall Street and the Federal Reserve never seem to meet eye to eye. The Fed’s duty is to manage the balance between economic growth and inflation by adjusting the nation’s benchmark interest rate. By raising or lowering rates, the Fed makes money more expensive to borrow in good times and easier to borrow in bad times.
Wall Street expressed its satisfaction with the pick by sending stocks sharply higher, with the Dow Jones industrial average up nearly 170 points.
The dollar rose in Asia on speculation consumer confidence and growth reports this week will show the economy is expanding fast enough for the Federal Reserve to keep raising interest rates to stem inflation.
The Bond market
The bond market moved lower, partly in response to rising stocks and perhaps in part to concerns that Ben Bernanke as Federal Reserve chairman would be softer on inflation than his predecessor.
Investors, of course, would prefer lower interest rates to maximize corporate profits and, thus, the value of their stock. But as much as Wall Street and Greenspan have been at odds, there’s a great deal of respect on the Street for the outgoing Fed chairman, who’s been in the post for 18 years, under four presidents.
Times have changed since Greenspan was first appointed, however, and Bernanke, who’s expected to be quickly and easily confirmed by the Senate, will face new challenges.
“The thing is, he faces a different forward look than Greenspan did,” said Joseph Battipaglia, chief investment officer at Ryan Beck. “You’re seeing a rising curve on inflation, volatile oil prices, and a global perspective on trade that wasn’t there 20 years ago.”
When Greenspan steps down after the Fed’s late January meeting, Bernanke will face an economy that is expected to slow considerably in 2006, as well as high energy prices that could prompt wider inflation. That combination — a stagnant economy and inflation — is Wall Street’s worst nightmare, since corporate profits will shrink considerably.
Yet the optimism on Wall Street centers on Bernanke’s reputation as a proponent of transparency. Greenspan leaves the job with a reputation as an opaque speaker, couching his assessments of the economy in “Fed-speak.” With his iconic status, it’s not surprising that Greenspan chose his words carefully in order to avoid spooking the financial markets.
Bernanke, however, can set a new tone.
“I think he already has fairly good inflation-fighting credentials, and I think he’ll continue advocating transparency at the Fed, letting people know what the Fed’s goals are and how it hopes to achieve them,” Harris said.
There’s also the possibility that, as a member of Bush’s economic team, Bernanke may be more willing to ease interest-rate increase should the economy face a downturn. While Greenspan lowered rates after the dot-com bubble burst in 2000 and after the 2001 terrorist attacks, he was also willing to raise rates through other painful economic times to keep inflation in check.
“I think Bernanke may be more predisposed to set more accommodative interest-rate policies to keep the economy out of the ditch,” said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers. “And I think what the market is saying today with this jump is that if something bad were to happen in the world, we think this guy would be willing to turn on a dime and lower rates.”