Ben Bernanke's legacy at the Federal Reserve won't really be his to forge. Barack Obama said shortly before Wednesday's meeting wrapped up that the chairman already had done enough. If so, Bernanke's successor will face the task of rolling back years of ultra-easy monetary policies. Jittery markets make that tricky even for a known Fed boss. After Wednesday, Bernanke may have only five FOMC meetings left to help set a new direction.
The chairman's term ends in January and Obama's remarks in an interview broadcast this week suggest he probably won't be reappointed. Even more than most of his predecessors, Bernanke leaves his replacement with unfinished business.
Interest rates have been substantially negative in real terms for five years. The Fed's balance sheet has swelled to $3.5 trillion, with $3.1 trillion of securities held outright. And $85 billion of monthly Treasury and agency bond purchases, which the Fed again said it would continue for now, is financing a large portion of the US budget deficit and new housing market activity.
At some point, all these monetary levers will have to be returned to neutral. Markets are bound to struggle with the shift. A Fed chairman in whom investors have confidence will be important to the process.
That was made clear in 1979, when doubts about Bill Miller and his lax attitude toward inflation helped spark a bond market debacle and crash in the dollar that ultimately led to his being swiftly replaced with Paul Volcker. Bernanke's gargantuan, unprecedented infusion of money into the system will leave little room for error for the next chairman. False signals or unexpected policies could easily test the confidence of the markets. Following this latest meeting, after which Bernanke outlined during a press conference a possible timescale for scaling back central bank purchases, the chairman has five more scheduled gatherings of the Federal Open Market Committee before his term ends. The best way to ease the path of his successor would be to use his credibility to proceed with the first steps he flagged in the exit process to keep markets relatively calm. That way, whoever comes next, whether it's a believer in loose or tighter monetary policy, will be able to set a course that doesn't have to start with the messy business of reversing Bernanke's.
