Ben Shalom Bernanke is approaching the end of his second term as chairman of the United States Federal Reserve. He is leaving when his term expires in 2014. Bernanke established himself as a foremost expert on the causes of the Great Depression and was an excellent person to have at the helm of the Fed during the worst recession in three quarters of a century. His work supported the assertion of economists Milton Friedman and Anna Schwartz that a primary reason for the depression of the thirties was that the Federal Reserve reduced the credit supply when they should have increased it. The issue of the day regarding the Federal Reserve and the US economy is the policy of purchasing an $85 Billion mix of mortgage securities and treasury bonds. This quantitative easing policy is often credited with the slow but sure revival of the US economy post-recession and is expected to be gradually phased out as economic conditions warrant. The market response to the pending stimulus reduction has been a rise in bond and treasury interest rates and stock market concern. Fundamental analysis of both the stock and bond markets today relies heavily on predicting what the post Bernanke federal reserve will do and when.
Who Will Run the Post Bernanke Federal Reserve?
The current front runner for the position is Janet Yellen who is the vice-chair of the US Fed board of governors. She was also a key player in the development of the quantitative easing program. Yellen moved to the front when previous front runner Larry Summers bowed out in response to expected opposition from Democratic senators. Others with include Donald Kohn who worked at the Fed for forty years and as a governor for the last eleven and vice chairman for four and Alan Blinder who is also a former Fed vice chairman. These folks are all insiders and could well be expected to continue current policies for which they have consistently voted. A dark horse prospect is Stanley Fischer should the President decide to pick someone from outside of the Fed. Born in Zambia, Fischer was a governor of the Bank of Israel and is a highly respected economist. As the anticipated end of bond purchases drives stocks down investors are concerned that a radical change in direction could greatly upset markets and the economic recovery. As such many expect the President to pick the front runner, Yellen. However, there is no reason that the President could not ask Mr. Bernanke to stay on! A decision to delay a post Bernanke Federal Reserve might surprise many but be a comfort to the markets.
Profitable Investing in the Era of the Post Bernanke Federal Reserve
Sound stock investing principles do not change no matter who runs the Fed or who is in the White House. Wise investors look at the intrinsic value of a stock and its margin of safety. A company with fundamentals that predict continued growth is a good long term pick. A company that has a good margin of safety in the form of property, inventory, and low debt will remain strong throughout an economic downturn. In the post Bernanke Federal Reserve era general economic principles will still apply and those who watch closely and do their homework will succeed.