August 24, 2009

Markets will like the removal of uncertainty now that President Obama has committed to Fed Chairman Bernanke’s reappointment. Confirmation by the US Senate is expected without much difficulty.

History shows that uncertainty is the enemy of markets. Much speculation about Bernanke and a possible Summers succession has swirled in market analysis circles. That is over.

Bernanke’s reappointment makes Fed policy a little more predictable. Bernanke clearly responded to the Lehman failure and the cascade that followed with unprecedented stimulus and imaginative and creative use of new Fed tools. Agree or not, the types of applications and the size of intervention are now established in the annals of Fed policy making as one of the most dramatic responses ever. This is the hallmark of the Bernanke regime.

We can expect this approach to continue now that the cloud of uncertainty has been lifted. Will the policy succeed in stemming more economic damage and returning the economy to a growth path, without substantial inflation? That remains to be seen. But we do know that Bernanke is committed to stimulus without limits in order to avoid deflation and depression.

We do not expect this news to trigger any extended market movement. About 70% of those market professionals polled were assuming Bernanke’s reappointment. Others were wondering whether the Obama administration would see this as a benefit to their politic agenda. Clearly the internal power at the White House has decided that reappointing Bernanke is in the president’s political interest. So be it.

The Fed still faces a daunting task. It must persist in easy policy for a protracted period and then turn attention to the inflationary threats that may arise. That is a difficult task under any circumstances and even more so when the economy and the financial system have experienced a crisis of the proportions we have seen.

We wish the reappointed chairman success. Meanwhile we remain vigilant and recognize that, in a globally linked world, financial integration means that no single central bank and no one chairman of it has ultimate and dominant power. Bernanke needs to find a path for coordinated action when the time to remove the stimulus is at hand.

David R. Kotok, Chairman and Chief Investment Officer, email:

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