What will the end of Bernanke's term mean?

January 28, 2013

| MoneyRates.com Senior Financial Analyst, CFA

A new poll indicates that two-thirds of economists expect that Federal Reserve Chairman Ben Bernanke will not return to that post for a third term. With the end of his current term due to expire in about a year (January 31, 2014), it's not too early to begin examining what a change in leadership at the Fed might mean for interest rate policy.

A CNNMoney poll released last week found that although two-thirds of respondents believe another term for Bernanke isn't in the cards, most believe it would be helpful to the economy if he were to return. If he leaves, it could open the door for a number of outcomes.

Should he stay or should he go?

Many of the economists surveyed believe it will be Bernanke's choice whether he serves a third term. Here are three scenarios that could result if Bernanke leaves:

  1. Bernanke's departure would be bad because markets hate uncertainty. Whatever you think of Bernanke's decisions, it would be hard to argue that he hasn't been fully committed to his policies in response to a very challenging situation. A certain predictability is calming to the financial markets. Until the markets gain that kind of comfort level with Bernanke's successor, speculation about the future direction of Fed policy could cause some volatility. Political wrangling over the nomination and confirmation process could stir things up even more.
  2. His departure would be a welcome change because his policies have had dubious results. On the other hand, if Bernanke's low-interest-rate policies haven't worked by 2014, might it not be time for a change? While current mortgage rates have helped prop up the housing market, what has never been fully addressed is the economic impact of the income that has been lost by reducing interest rates on savings accounts and other deposits to nearly nothing.
  3. It's won't matter either way because Bernanke isn't a one-man band. While the Fed Chairman is the point person for presenting and defending monetary policies, he doesn't work in isolation. Those policies are decided on by the Federal Open Market Committee, which has 12 members (including the Chairman). While this committee hasn't been unanimous in supporting recent policies, they have operated with a pretty broad consensus.

The extreme low-interest rate policies of the current Fed were designed to apply temporary stimulus to an economy in crisis. Those polices have evolved into increasingly longer-term commitments as growth has remained sluggish. Eventually though, current levels of interest rates will likely prove unsustainable and rates will have to be restored to more normal levels.

Engineering a restoration of normal interest rates without creating too big of a drag on the economy could be the biggest challenge of the next term for the Fed Chairman, whether it's Bernanke or someone else. As significant as the Chairman's post is, often it is conditions that really dictate policy.

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