Managers, Markets Mull New Choice for Fed Chair

WASHINGTON (HedgeWorld.com)--As interest rates keep moving up, Alan Greenspan's term is all but wound down. President Bush's choice for Mr. Greenspan's successor, Ben Bernanke, was announced today and is likely to be confirmed as keeper of the interest rates.

Mr. Bernanke has a good reason to expect a nod from the Senate; in June he won the Banking Committee's approval to lead the Council of Economic Advisors, serving as the president's top counselor on markets and money.

A former member of the Board of Governors of the Federal Reserve System, Mr. Bernanke's experience inside the Beltway is well established. Wall Streeters seem for the most part comforted by his credentials, but remained concerned on how easily the economic policy torch will be passed on. The Dow Jones Industrial Average was up almost 270 points today.

In a press briefing, Mr. Bernanke said he wanted to help to "ensure the continued prosperity and a stability of the American economy."

Chicago-based Lotsoff Capital's David Hershey believes that the bond market is mildly upbeat on the appointment so far.

"I think the market reaction to the new appointment is fairly subdued." Mr. Hershey said. He noted that "yields are up four to six basis points, which isn't much when compared to when they announced Alan Greenspan was replacing Paul Volker," Mr. Hershey said.

The transition from Mr. Greenspan's famously cryptic vernacular--he once said, "If you have understood what I said, then I have misspoken"-- to a possibly clearer message coming from a new chair may be a refreshing change if Mr. Bernanke is indeed more "straight talking," Mr. Hershey said.

Inflation watch

Mr. Bernanke's form of Fedspeak will undoubtedly be under scrutiny. In a speech last week, he remarked on the nation's strong and sustainable economic expansion.

"The resiliency of the economy--the product of flexible labor markets, a culture of entrepreneurship, liquid and efficient capital markets, and intense market competition--is helping it to absorb the shocks to energy and transportation from the hurricanes," he told the congressional Joint Economic Committee.

At the same time, Mr. Bernanke mentioned that, because of rising energy costs, the prices of non-energy products continued to rise at moderate rates, causing a "notable" rise in overall inflation so far this year.

One bond manager, Edwin J. Ferrell, said the bond market is a bit nervous about Mr. Bernanke's reputation as an "inflation dove." However, the bond market should be heartened that Mr. Bernanke is a proponent of inflation targets, said Mr. Ferrell, senior vice president and director of research at 40/86 Advisors, Carmel, Ind. While Mr. Greenspan generally gave some indication of targets, he never stated them explicitly, Mr. Ferrell said.

Mr. Ferrell said Mr. Bernanke, a former economics professor at Princeton University, is "certainly qualified" for the job, by dint of his academic and government experience. "We can take comfort in his expertise," Mr. Ferrell said.

Not everyone believes that Mr. Bernanke's leadership will be a breath of fresh air or will bring greater transparency to the Fed. Michael Panzner, vice president at Rabo Securities USA Inc., foresees a choppy transition phase.

"It would not be surprising, in fact, to see a period of internal strife at the Federal Reserve that is akin to what has happened following the death of certain iron-willed Communist leaders, which could stir up a real hornet's nest for investors and managers," Mr. Panzner said in an emailed response to a question on Mr. Bernanke's nomination.

"While we knew this change was coming, there will be transition issues," said Mr. Ferrell.

Dollar Down?

A senior foreign exchange dealer at Chicago-based Alaron Trading Corp. Craig H. Russell, sees Mr. Bernanke as lacking "real world" experience. He also doesn't think that Mr. Bernanke will cooperate with the financial markets as much as Mr. Greenspan did.

In the currency markets, he said, Mr. Bernanke's stewardship and policies are likely to cause the U.S. dollar to reach a new low versus the euro next year, he said.

Mr. Russell said he is concerned that the nominee is on record as saying believes that the only way to correct imbalances in the U.S. economy is to make sure the dollar is weakened.

The naming of Mr. Bernanke was widely expected. He is expected to pass the congressional committee hearings without a hitch.

Terry Stanton, Christopher Faille and Chris Clair contributed to this story.

SBarreto@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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