By Steven K. Beckner
(MNI) – The reelection of President Barack Obama ends one area of
uncertainty, at least for now: Ben Bernanke will presumably remain chair of the
Federal Reserve for a while yet.
Uncertainty about the outlook for monetary policy remains, however.
Had he won, Republican candidate Mitt Romney had made clear he intended to
replace Bernanke. There was speculation he might have asked for Bernanke’s
resignation soon after taking office, although it is possible Romney might have
asked the Fed chief to stay through the end of his second term on Jan. 31, 2014.
Monetary policy would not have changed immediately, but potential Bernanke
successors like Romney campaign advisors Glenn Hubbard and John
Taylor told MNI before the election they would have pursued a different course
over time — a less activist, less discretionary, more inflation-conscious
approach.
Columbia University professor Hubbard warned against additional monetary
stimulus before the Fed’s policymaking Federal Open Market Committeee launched a
third round of large-scale asset purchases in September, warning it would not
only be ineffective but could further endanger the central bank’s independence.
Hubbard, who chaired President George W. Bush’s Council of Economic
Advisors, also objected to the FOMC’s use of “forward guidance” — setting a
distant calendar date for raising the federal funds rate.
For communication about the path of the funds rate to be an effective
monetary policy tool, “it has to be tied to some path of forecast for the
overall economy,” Hubbard argued, but “what ails the economy at the moment is a
set of structural problems. Monetary policy just isn’t a very effective tool.”
Stanford University Professor Taylor, for whom the “Taylor Rule” of
monetary policy is named, made clear he would pursue a more rule-based monetary
policy.
Far from helping the economy, Taylor said the Bernanke Fed’s use of
quantitative easing and other unconventional policy tools have been
counterproductive.
“I just think those have not been helpful,” Bush’s Treasury under secretary
told MNI last week. “In a way they are part of the uncertainty more generally
about policy. Monetary policy has become part of that uncertainty. People are
concerned about how it’s going to be undone.”
Now such ideas will have to remain in the world of academia. Although some
Federal Reserve Bank presidents sympathize with the Hubbard/Taylor views, they
are in the minority on the FOMC.
Bernanke, himself a Republican first appointed by Bush and reappointed by
Obama, will be able to continue pursuing his unconventional and often aggressive
monetary stimulus measures.
Most recently, he led the FOMC Sept. 13 to take unprecedented actions to
try to boost a sluggish economy and bring down high unemployment.
Not only did the FOMC launch a third round of “quantitative easing,” it
made “QE3″ open-ended, announcing it will keep buying $40 billion a month of
mortgage backed securities until the labor market shows “substantial”
improvement.
These MBS purchases, financed by the creation of new money, comes on top of
$45 billion per month of long-term Treasury security purchases, financed by sale
of short-term securities, in the second phase of “Operation Twist. Bernanke and
other Fed officials have let it be known they are prepared to increase or change
the composition of QE3.
As San Francisco Fed President John Williams, an FOMC voter, said last
Friday, “we may expand our purchases to include other assets.”
Not only did the FOMC extend the anticipated period of zero short-term
rates through at least mid-2015, it said it “expects that a highly accommodative
stance of monetary policy will remain appropriate for a considerable time after
the economic recovery strengthens.”
Bernanke will presumably complete his second term and could be reappointed
to a third term in 2014, although there have been unconfirmed rumors that he is
not interested in one.
If Bernanke chooses to return to Princeton University or pursue other
interests after January 2014, a likely successor would be current Vice Chair
Janet Yellen. And, if anything, most observers think she would be even more
aggressive in trying to use monetary policy to reduce unemployment, even if it
means a temporarily higher rate of inflation.
His reelection also means Obama can fill any vacancies that may open up on
the Fed Board of Governors with men or women to his liking.
While uncertainty about Fed leadership has ended for now, uncertainty about
monetary policy goes on, because uncertainty about fiscal policy and the
economic outlook is undiminished.
In the near-term, the FOMC must continue to worry about the federal debt
ceiling and about the looming “fiscal cliff” — the roughly $600 billion of tax
hikes and spending cuts scheduled to hit in January if Congnressional Democrats
and Republicans fail to reach an agreement to avert them.
The Congressional Budget Office, the International Monetary Fund and
others have warned the U.S. could go back into recession if there is no deal —
with worldwide economic repercussions.
The election leaves a bifurcated Congress, which seems likely to remain at
loggerheads over resolving the budgetary stand-off.
Of course, it is possible, perhaps likely, the Democratic Senate and the
Republican House will once again “kick the can down the road” and extend the
budgetary deadlines. But that will not change the FOMC’s quandary over the
longer term.
Unless deficit spending is brought under control, it seems likely the
federal debt will continue to grow at a roughly $1 trillion annual pace,
increasing as a share of GDP.
That has the potential to put upward pressure on yields even if economic
growth remains slow and undermine global market confidence in the dollar,
greatly complicating the conduct of monetary policy.
Without some kind of fiscal clarity, firms and households would remain
uncertain about future tax rates, which would have an enormous bearing on
growth. Business contacts have been telling Fed officials for months that these
and other uncertainties are causing them to delay hiring and investment
decisions.
Continued consumer and business reluctance to spend could keep the recovery
from picking up enough speed to make the “substantial” progress
against unemployment that the Fed is seeking. That in turn could induce the FOMC
to do even more quantitative easing.
Obama’s reelection also would seem to assure full implementation of his
national health care plan, which Fed contacts have also frequently cited as a
source of uncertainty about business costs.
The Fed also will have to reckon with the election’s implications for other
types of government intervention in the economy.
Romney advisors had said their candidate would take a much more restrained
approach toward regulation in a variety of areas, and might roll back
regulations which firms had cited as another disincentive.
Instead a reelected Obama will now be able to reaffirm energy,
environmental, financial and other regulatory initiatives.
The U.S. economy remains primarily a market-driven economy, and it has its
own dynamic. Ahead of the election, there were some encouraging signs the
economy was at last picking up some steam.
But if the economy remains sluggish, or worse, if fiscal or other shocks
cause another economic contraction, the activist Bernanke Fed will doubtlessly
be there in force.
** MNI **
–email: sbeckner@mni-news.com
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