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The Fed is about to get less predictable--and that's not good
03/02/2010 2:30 pm EST
On March 1 Federal Reserve vice-chairman Donald Kohn announced that he would be stepping down in June.
Kohn has been a key No. 2 to Fed chairman Ben Bernanke throughout the financial crisis. He led the stress test of big banks and efforts to coordinate the Fed’s actions with those of its global partners through the Bank of International Settlements.
Most importantly though he’s been head wrangler helping Bernanke keep the members of the Federal Open Market Committee, the Fed’s interest-rate setting body, relatively united on policy.
With the Federal Reserve facing a huge test of discipline—Can the central bank manage to gradually withdraw the stimulus it added to the economy during the crisis quickly enough to avoid a spike in inflation or in interest rates but not so quickly that it tips the economy back into recession?—Kohn the consensus builder will be missed.
Whatever you think of the policies he helped engineer, his departure makes the Fed just a little more unpredictable, a little more vulnerable to members leaving the reservation, a little more likely to spook markets with an ill-considered word at a time when the financial markets are already worried about the Fed’s ability to find the right course.
Kohn’s departure is likely to lead to even more truculence from inflation hawks such as Thomas Hoenig, president of the Kansas City Fed.
On the morning of Kohn’s announcement, Hoenig was on CNBC pushing his view that the crisis is over and that the Fed should remove its promise to keep its benchmark interest rate near zero for “an extended period.” (For more on the role of interest-rate hawks at the Fed see my post http://jubakpicks.com/2010/02/23/are-interest-rate-hawks-pushing-policy-at-the-federal-reserve/)
Kohn’s departure adds another empty seat to the two existing vacancies on the Fed’s seven-member board of governors. The combination gives President Barack Obama a chance to shape the Fed but it also guarantees a contentious confirmation battle in the Senate over any Obama candidate.
Remember how heated the Bernanke confirmation hearings were? Expect the same when President Obama sends a nominee to fill Kohn’s chair to the Senate.
And of course, the longer all these chairs stay empty at the Fed, the harder it will be for Bernanke to build consensus and the louder the dissenting voices will sound.
Just one more thing to add to a long list of things to worry about in 2010. (For more on that list see my post http://jubakpicks.com/2010/02/16/how-to-worry-and-when-in-2010/ )
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