Wall Street welcomes incoming Fed chair
Published: Tuesday, January 31, 2006 at 6:01 a.m.
Last Modified: Monday, January 30, 2006 at 10:45 p.m.
Merrill Lynch lowered its ranking of the financial sector from seventh to ninth among Standard & Poor's 10 stock sectors, with concerns about Bernanke given as one reason for the downgrade. UBS is already talking about how the new Fed chairman can allay doubts about him. And some events marking the transition between chairmen are decidedly backward looking.
Bernanke was a popular choice as Fed chairman. On the day his appointment was announced, stocks had their best close in roughly six months; the Dow Jones industrial average rose nearly 170 points.
But the truth is that after 18 years with Alan Greenspan as Fed chair, the Street is still fixated on the man.
The American Enterprise Institute hosted an event on Jan. 24 titled, "What Will Greenspan's Departure Mean?"
One topic of discussion: "Will Federal Reserve policy change under Bernanke, or has the Greenspan approach been hard-wired into the Fed?" Translation: Will it even matter that there's a new chairman?
"It's natural to be nervous about the transition," said Marvin Goodfriend, professor of economics at Carnegie Mellon's Tepper School of Business. "It's the nature of the beast, when someone has been terrifically successful at this job, like Alan Greenspan has been, and has been in the job for a long time, you have to adapt to a new style of leadership. But I don't personally believe there will be much difference in the substance of the leadership."
Investors are hoping he's right. Richard Bernstein, Merrill Lynch's U.S. strategist, said when he lowered his rating for the financial sector on Jan. 17, "if new Fed Chairman Bernanke is not as 'dovish' (toward inflation) as the market apparently expects, then investors might have to reconsider their recent enthusiasm toward financial" stocks, which could be hurt by further interest rate increases.
Other investors are concerned that he won't use short-term rate hikes to pop economic bubbles, as some feel Greenspan has done, using the most recent rate increases to cool down housing prices.
Others are less nervous about Bernanke's policies than where he comes from.
"(G)iven his academic background, investors are more likely to question Mr. Bernanke's ability to analyze real-time data, something Mr. Greenspan was famed for, than his commitment to low inflation," UBS economist Maury Harris wrote in December.
"In that context, he will lose credibility if he under-appreciates the extent to which (economic) growth is already weakening in response to earlier rate hikes," Harris wrote. He then added ways Bernanke could "address doubts about his inflation-fighting credibility."
Some investors dare suggest Bernanke may have strengths Greenspan lacks.
Penny M. Russell, executive vice president of H.C. Wainwright & Co. Economics Inc., points out that Greenspan was a child of the Great Depression, while Bernanke's experience "is squarely within the baby-boomer generation." Greenspan is 79, while Bernanke is 52.
"That can't help but imbue him with a more optimistic approach to the resilience of American financial markets," Russell wrote.
Merrill Lynch's U.S. economist David Rosenberg wrote, with a nod to Greenspan's often ambiguous speeches, "Given his (Bernanke's) past accessibility to market types, his Fed experience, and the fact that we will not have to reach for a bottle of aspirin when reading his speeches, we think Bernanke is a great choice for Fed chairman."
When Bernanke was a Fed governor, "practically every portfolio manager we met with who visited the Fed had met Bernanke and had positive things to say about him," Rosenberg wrote.
Russell said Nobel-prize winning economist Milton Friedman was asked if he would like to see another genius at the Fed. His response, she reported, was, "Of course, we'd like to have another one." Then he reconsidered, "Though wouldn't it be better if we learned that we could do without one?"
Russell wrote, "We agree. But absent that happy circumstance, it just may be that Mr. Bernanke will prove to be the next best thing."
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