No Hassle For Bernanke: New Fed Governors Won't Limit The Chairman?

MAKE MONEY BLOG$~The Senate approved the appointment of two new Federal Reserve Board governors on Thursday.  Jeremy Stein and Jerome Powell, nominated by the Obama Administration, will probably ensure the continuity of monetary policy, according to Nomura, as both academics are expected to vote in line with the Chairman on key issues.

The Federal Reserve has been the focus of much criticism over the last couple of years, as Chairman Ben Bernanke sought to lead the U.S. economy via aggressive monetary policy.  Bernanke, a former academic at Princeton University, will count with two new members at the Federal Reserve Board that will do little limit his monetary decision, according to analysts at both Nomura andBarclays.

Neither Stein nor Powell are monetary policy experts, noted Nomura.  Stein comes from the economics faculty at Harvard, and was formerly at MIT teaching finance.  “His research has focused mainly on financial topics, including behavioral finance, stock market efficiency, corporate investment and financing, risk management, banking, and financial regulation,” according to Barclays, while he has also looked at macro prudential approaches to financial regulation.  Stein had served as a senior advisor as the Treasury and was part of the Obama Administration’s National Economic Council.

Powell is a lawyer and has a past in private equity, noted Nomura’s research team.  He served as Under Secretary of the Treasury for Finance during the Presidency of George Bush Senior, and is a Princeton graduate.

Both will “likely increase the continuity of monetary policy” as “the next President will have fewer vacancies to fill on the Board thereby limiting the scope for new appointments to shift the direction of Federal Reserve policy,” according to Nomura.  Barclays completed the thought:

We do not view Stein or Powell as having any particular bent on the conduct of monetary policy and view them as likely to vote in line with the chairman and vice chair regarding the implementation of policy through the federal funds rate, asset purchases, and other unconventional policy measures.

Under Ben Bernanke, the Federal Reserve applied unorthodox monetary policy by dropping the Federal Funds rate to zero and then engaging in two programs of long-term asset purchases, or quantitative easing.  Bernanke’s goal has been to push rates down in order to support what has been a stubbornly slow economic recovery.

Ultra-accommodative monetary policy should help spark a wealth effect by spurring lending, pushing investors out of the “safety” of Treasuries and into riskier assets.  This in turn should push up the price of equities and other risk assets, fueling an increase in the net worth of people and companies, and spurring further investment, which should then increase firms’ profitability and help reduce the unemployment rate.

While Bernanke has managed to avoid a depression, the economic recovery has been muted at most.  His programs of QE have flooded markets with cheap money, much of which helped fuel stock rallies, also pushing up gold and emerging market equities, that later fell back down as employment and housing data failed to keep up.  The unemployment rate has gradually fallen, but housing markets remain depressed.

Some believe the Fed has made the situation worse.  By flattening the yield curve, it has made it difficult for banks to profit from lending, lowering their incentive to do so.  Failing to spark a recovery in housing prices has also hurt major banks like JPMorgan Chase, Bank of America, and Citi, which hold vast numbers of depressed property loans on their books.  The oversupply of foreclosed and distressed properties has been cited by David Blitzer, chairman of the Case-Shiller Home Price Indexes, as a cause for the continued depression of housing markets.

source: forbes.com

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