September 23, 2013

The Next Fed Chair and Your Portfolio

By Sasha Cekerevac for Investment Contrarians 
One of the most hotly debated topics right now is who will be the next chairman of the Federal Reserve. As you may know, the current chairman of the Federal Reserve, Ben Bernanke, is set to retire, so someone new will take the helm of the most powerful central bank in the world in January.
At stake is a potential shift in monetary policy over the next few years. While many people might not realize how important this is, believe me when I say that the chairman of the Federal Reserve is a role that could impact everyone.

News over the past week that Lawrence Summers has withdrawn his candidacy for the Federal Reserve chairman role came as quite a shock, as many analysts believed he was the front-runner to be chosen by President Obama. With Summers now out of the race, this bumps current Federal Reserve Vice Chairman Janet Yellen to the top of probable candidates.
With Summers previously questioning the Federal Reserve’s current monetary policy program of asset purchases, many market participants thought that if he were elected to head the Federal Reserve, he would initiate a tighter monetary policy strategy as compared to Yellen. In comparison, because Yellen currently plays a significant role in the Federal Reserve, the markets are assuming that she will continue the accommodative monetary policy currently in place and may continue with this policy for a much longer period of time.
The markets are already reacting to the news. Because of the belief that Summers would have been quicker to pull back on monetary policy, his resignation from the race has led to a boost in the markets. Market participants know that without Summers as a possible candidate to head the Federal Reserve, there will most likely be a continuation of the current monetary policy if Yellen is chosen.
Regardless of whom the new chairman of the Federal Reserve will be, my real concern is that the current monetary policy strategy is becoming increasingly ineffective. Not only is the impact of monetary policy quite small on the real economy at this point, but the risks are beginning to rise.
As I have written in these pages many times before, the current extreme monetary policy plan should be used only in emergency situations. While the economy is not growing at a rapid rate, we’re not in the crisis we were several years ago. As the Fed announced yesterday, it won’t be adjusting its monetary policy at this time. While the markets may have reacted positively, I don’t believe continuing this excessive monetary policy plan will do much to help the average American.
When we were at the depths of the recession and there was an actual liquidity problem in the financial system, yes, the monetary policy plan instituted by the Federal Reserve did prevent a catastrophe from occurring. But much like a fire, once the initial blaze is over, the firemen aren’t helping the situation much by continuing to unnecessarily pour water on the embers. But this is exactly what the Fed is doing by continuing its policy unadjusted.
For the economy to begin accelerating, we need real structural reforms, not looser monetary policy. But this type of long-term reform is beyond the scope of the Federal Reserve—this is where politicians in Washington need to step up and make difficult decisions to help grow our economy through real reforms, such as creating incentives for new businesses to be created and existing businesses to be expanded. If someone wanted to start a business, there should be as few hurdles as possible, as we want to encourage this sort of activity to boost the U.S. economy. I think that’s a simple and sensible goal.
If the politicians in Washington continue to expect the Federal Reserve to step in when they are incapable of acting, you can expect to see this have a negative impact on the economy. The longer this monetary policy program goes on, the greater the risks are to the U.S. economy.
Courtesy Sasha Cekerevac for Investment Contrarians  (EconMatters Author Archive Here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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