Next Man (Or Woman) Up: New Fed Chairman Will Face Long, Hard Road

by John Kiernan on August 29, 2012

federal reserve sealA couple of things occurred to me while watching coverage of the Republican National Convention this week (I’m an Independent, if you’re wondering): 1) What would Will McEvoy make of all this? and 2) The impending election season means forthcoming political turnover, and that could have a significant effect on our finances.

Quickly, I answered that first question for myself (he’d probably yell at everybody) and moved on to my second notion. Soon thereafter I realized that elected officials aren’t the only ones that will have some measure of control over our wallets in the near future. I mean, has anyone thought about the role Ben Bernanke’s successor will play in shaping financial policy as the next chairman of the Federal Reserve, an appointed position.

The Federal Reserve is the primary body shaping US economic policy, and during times of economic turmoil, such as the last few years and those to come, there is perhaps more pressure on its leader than anyone aside from POTUS and a handful of other key officials. Therefore, even though Bernanke’s term doesn’t end until January 2014, it’s important to get a good look ahead.

First of all, let’s clarify why Bernanke won’t be Bernanke’s successor (he could conceivably serve another term). He was a Bush appointee, and most experts agree that President Obama kept him on to preserve continuity during the worst of the recession. With the economy progressing, those same experts predict that whoever wins a seat in the Oval Office this fall will opt to go in a different direction – Obama will most likely push for a Dem and Romney has already said Bernanke isn’t one of his keepers.

Ok, but won’t any circumstances encountered by the next Fed chairman pale in comparison to the trials and tribulations Bernanke experienced during perhaps the worst financial downturn since the Great Depression?

Interestingly, the difficulty of Bernanke’s term is exactly what will make things so rough on his successor. Bernanke faced unprecedented circumstances and dealt with them in an unprecedented manner. The Fed has kept interest rates near zero and tried to jump-start the economy with two separate rounds of Quantitative Easing (QE) – an unconventional tactic whereby assets are purchased from banks and private companies using newly created electronic funds in order to promote lending. Oh yeah, and Bernanke had to prevent inflation while shoveling all this new money into circulation. Such measures have never before been taken, yes, but they haven’t been undone either, and easing the nation’s financial policy back into a sustainable equilibrium is perhaps as important to the well-being of the economy as instituting them in the first place.

You also have to think about the leadership that would be required if the economic recovery reversed course and/or things across the pond in Europe took a dramatic turn for the worse. What happens if unemployment rises instead of falling, as is currently predicted? What happens if the nation’s political leadership decides the Fed isn’t all that important and strips it of certain powers?

That last hypothetical is more plausible than most of us would like to believe.

In April Congressman Kevin Brady (R-Tx.) introduced the Sound Dollar Act into Congress, seeking to end the “dual mandate” the Federal Reserve has had since 1977 to minimize unemployment and curb inflation. It’s unlikely to have legs, at least at this juncture, but the message that this law sends is clear: Federal Reserve, you are on notice, and the status quo could go.

This is the soap opera that will play out over the days, weeks, and, years to come. And if you are not yet convinced of how difficult a job the next Fed chairman will have, just look at the current one. He’s set to give a speech on Friday, and it seems like everyone and everything – from individual investors to CEOs to entire markets – are holding their collective breath. Let’s just say, the faint of heart and weak of mind need not apply.

In the meantime, the only thing that’s clear is that nothing about our nation’s financial future is clear, given the looming specter of the debt crisis, troubles in Europe, and even the tenuous role of the Fed itself. This uncertainty necessitates being ready for anything, so we should all strive to be conservative with our spending, avoid taking unnecessary investment risks, and keep building our emergency funds until we get a better sense of what lies ahead.

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