The New York Times columnist Andrew Ross Sorkin is reporting that Federal Reserve Chairman Ben Bernanke has told “close friends” that he “probably will not stand for re-election,” even if President Obama manages to secure a second term. Bernanke’s second term is set to end in early 2014. Meanwhile, in a separate front page report, the Times’ man on the Fed beat, Binyamin Appelbaum, lays out how Republican candidate Mitt Romney has said he would replace Bernanke if he gets in. (Strangely the front page story makes no mention of the Sorkin scuttlebutt.)
This might seem like an inside the Beltway parlor game, but it really matters. In addition to creating money and using it to buy bonds in the financial markets — quantitative easing — one of the ways that the Federal Reserve has been able to push US interest rates as low as it has is by using the power of the Fed pulpit. The Fed has all but promised to keep interest rates exceptionally low through at least mid-2015. At one point that would have struck bond traders and investors as nuts and impossible. But after years of weak growth and relentless repetition of the Federal Reserve mantra that rates will remain exceptionally low for the foreseeable futures, the markets have finally started to believe the Fed means what it says.
But that’s the “Bernanke Fed.” A change at the top of the central bank would cause quite a bit of uncertainty as to whether the bank would follow through with the policies Bernanke has been pushing since the financial crisis hit. In theory, this alone could prompt a rise in interest rates on US government bonds, particularly for short-term debt. The idea is that if the Bernanke Fed’s policy of buying large chunks of US government debt is scaled back by a successor, prices for those bonds could fall, resulting in higher interest rates.
But we wouldn’t look for a spike in interest rates immediately. More likely is that we’d see a sharp move lower in riskier financial markets that have come to depend on a steady flow of fresh money to keep climbing. US stocks, up 14% year-to-date, would be the first place to look for a pullback.