Fed monetary course hard to undo for Bernanke successor

‘Very Comfortable’

“My guess is the next person is Janet Yellen, and she seems to be very comfortable going along with the policies to date,” said LaVorgna, a former economist at the New York Fed. “I imagine the transition, whoever it is, but likely her, being very seamless.”

Economists in a June 19-20 Bloomberg survey assigned Yellen a 65% probability of taking over the top job once Bernanke’s term ends. Timothy F. Geithner, a former Treasury secretary and former New York Fed president who worked closely with Bernanke in both those posts, was seen as the second most- likely successor, with odds of 10 percent.

The next Fed chairman will be “inheriting the last vestiges of the current policy regime,” said Eric Green, the global head of rates, foreign exchange, and commodities research at TD Securities Inc. in New York. “Basically they’re not going to have a lot to do that first year.”

Ensuing Regime

That will change after asset purchases end and the Fed prepares to start raising its benchmark interest rate, said Green, another former economist at the New York Fed. Then, the FOMC “will have an opportunity to completely define the ensuing regime -- the rate tightening regime.”

The Fed has tried to spell out how it will adjust policy in the future partly out of necessity. With short-term interest rates already effectively at zero, it can’t lower them further to promote growth. Instead the Fed has used asset purchases and more open communication -- promising, in effect, to keep short- term rates lower for longer -- to try to achieve that goal.

“Particularly when you’re in unconventional policy mode, talking about the future and how the Fed might react under certain circumstances is critical,” said Kohn, who is now a senior fellow at the Brookings Institution in Washington.

“One of the main thrusts of the Bernanke chairmanship is to help explain as best as the Federal Reserve could what their reaction function is,” he added.

Stocks Retreat

U.S. stocks retreated, sending the Standard & Poor’s 500 Index to a nine-week low, as Chinese equities entered a bear market amid concern a cash crunch will hurt the world’s second- largest economy and speculation increased that the U.S. will begin curbing stimulus.

The S&P 500 fell 1.7 percent to 1,565.07 at 10:01 a.m. in New York, the lowest level on a closing basis since April 22. The 10-year Treasury note yield rose to 2.61 percent at 10:09 a.m. in New York, after reaching 2.66 percent, a level unseen since August 2011.

The CSI 300 Index of China’s biggest companies tumbled 6.3 percent, the most since August 2009 and taking its decline from this year’s peak to more than 20 percent.

European bonds extended declines from last week, sending Germany’s 10-year yield to a 14-month high, as concern the Fed will begin curbing its stimulus plan this year damped demand for fixed-income assets.

Italian two-year note yields jumped to the most in six months, while Spain’s 10-year yield climbed above 5 percent for the first time in almost 12 weeks.

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