Carmel Fisher - Bernanke's likely replacement to create history

The global financial crisis and its aftermath introduced us to a whole bunch of new concepts and we learned to recognise some very important and influential people.  

The abbreviation QE (for quantitative easing or the purchase of bonds with newly created money) is commonly used, or at least understood, by people who don’t regularly read the business pages.  We all know how powerful Federal Reserve Chairman Ben Bernanke is, along with the President of the European Central Bank, Mario Draghi.

We are about to meet another important person, and this appointment could be a 100-year first: it may be a woman.  

Ben Bernanke is set to retire from his role as Federal Reserve Chairman in January 2014.  His retirement has been well signaled, which was important, given that his QE policy has been so pivotal to markets in recent years.  

What had also been well signaled was that there was a relatively short list of contenders for the role, and that the front-runner was a friend of President Obama’s - this is essentially a political appointment after all - Larry Summers.  

Markets haven’t really known what to make of Summers because he is generally regarded as being more hawkish than Bernanke.  Two words we have learned in recent years relate to the hawk and dove, where a person is considered to be hawkish if they support monetary tightening in order to avoid inflation, while a dovish person is more supportive of monetary easing and is prepared to tolerate some inflation in order to achieve economic growth.

Bernanke is generally regarded as dovish, so markets have been a little apprehensive about Summers’ possible appointment in case he would take a different approach to Bernanke’s QE programme, perhaps withdrawing it earlier than currently signaled.

Markets were therefore suprised when Larry Summers announced his withdrawal from the leadership race last week.  Summers withdrew after a period of political squabbling where the Democrats questioned his suitability, knowing that he was President Obama’s top pick.  Summers explained his withdrawal by saying he thought the process would have been acrimonious and would not serve the interests of the Federal Reserve or the interests of the nation.  

Markets obviously agreed, and rallied quickly and significantly.  

The next most likely contender, in fact the person now looking highly likely to be appointed, is Janet Yellen, who has been Bernanke’s deputy and is expected to stick closely to his QE tapering programme, thereby giving markets some certainty.  
On paper, Yellen is eminently qualified for the role.  She is a highly regarded academic economist who served on Bill Clinton’s Council of Economic Advisers in the late 1990s and was president of the Federal Reserve Bank of San Francisco from 2004 to 2011.  Since 2010 she has worked with Bernanke as vice-chairman of the Fed, helping craft the bank’s response to a weak recovery.

Despite an anti-Yellen campaign suggesting she might not have the ‘gravitas’ for the role (ie. she’s not a man and only men have held the role to date), Yellen looks set to become another name that we will become very familiar with in the years ahead.