It is fair to say that Tuesday’s stock market selloff is probably due to disappointing earnings, with concerns about Spain’s ability to meet its deficit target acting as a side-issue. But it is interesting that the decline also comes as observers speculate about Ben Bernanke’s future.
Mr. Bernanke ends his current term as chairman of the Federal Reserve in January 2014, and there is some talk that he either won’t seek a third term or won’t be asked to return, especially if Mitt Romney wins November’s presidential election. Mr. Romney has made clear his dislike of Fed stimulus policies.
The New York Times focused on the political angle in Monday’s paper, in a column by Binyamin Appelbaum. The election has become a close battle, especially after recent debates. As FT Alphaville pointed out, Intrade showed that Mr. Romney’s chances of winning the election jumped to 49 per cent from 41 per cent in early trading on Tuesday, before settling back.
But another column in the Times, by Andrew Ross Sorkin, reported on Monday evening that Mr. Bernanke has told close friends that he will step down as chairman even if Barrack Obama wins.
If Mr. Bernanke either signals that he will step down from the Fed when his term expires or Mr. Romney wins the White House, the impact on markets could be big. Mr. Appelbaum quoted former Fed governor Laurence Meyer: “I certainly would expect the markets to respond, that they will take this as the Fed being more hawkish and that will be reflected in rates.”
Of course, there are Fed policies beside low rates that have benefited investors over the past few years. The Fed has rolled out three rounds of quantitative easing (the policy of buying U.S. bonds) and one round of Operation Twist (or buying longer terms bonds after selling shorter-term bonds) – all with the aim of driving down borrowing costs and pushing investors to take more risks with their money.
Investors have responded, driving stocks considerably higher after each round of Fed stimulus, making Mr. Bernanke a good friend of the stock market. (The third round of quantitative easing, or QE3, has been the exception. The S&P 500 is down more than 1 per cent since the policy was introduced in mid-September.)
The concern, then, is that a new Fed chairman could switch tactics, adding to a whole whack of uncertainties facing the market right now, from an economic slowdown in China and an ongoing recession in Europe, to the U.S. “fiscal cliff” and disappointing corporate profits.
The Fed began a two-day monetary policy meeting on Tuesday, which culminates with a policy statement on Wednesday. At the last meeting, in September, a journalist asked Mr. Bernanke about his future at the Fed during the press conference. He responded: “I am very focused on my work, I don’t have any decision or any information to give you on my personal plans.”