Fed Chairman Ben Bernanke is widely expected to step down
after the completion of his term in January 2014. This gives him
a little more than a year to evaluate how his legacy will impact
Central Bank policy and how the economy as a whole will respond
to that in the years to come.
At the moment, two names are doing the rounds as Bernanke's
possible successor - Fed Vice Chairman Janet Yellen and Lawrence
Summers, earlier an economic adviser to the President and
currently a professor at Harvard University.
In any case, the next incumbent will be heir to Bernanke's
policy of making the business of monetary policymaking more
transparent. There are views both in favor and against this
approach, with the opposition claiming that it places stringent
constraints on the ability of his successors to react to economic
From the very beginning of his term, Bernanke has laid special
emphasis on unveiling the decision making process of the Federal
Reserve to the media and public alike. Starting with the release
of the FOMC's long-term projections for GDP, unemployment and
inflation, the process saw a high point when Bernanke conducted
the Fed's first ever post meeting news conference in April 2011.
The attempt has clearly been to move from a discretionary
approach, shrouded in ambiguity to one where rules and guidelines
become pre-eminent. The Fed will now set bands on specific levels
of unemployment and inflation which will indicate when it could
affect a change in interest rates.
The idea is to provide a strong assurance that borrowing will
remain cheaper over the long term while maintaining the Fed's
freedom to react to changing economic conditions. This has clear
implications for the economy as a whole but for the financial
sector in particular, since this sector has a nearly direct
cause-and-effect relationship with monetary policy.
Of course, the current interest rate environment is a direct
result of QE3, which has pushed interest rates to near zero
levels. Fed Chairman Ben Bernanke expects rates to remain at such
levels till mid 2015. This has led to the flurry of refinancing
on individual mortgages, which has resulted in large profits from
However, low interest rates have pushed interest income to the
floor. This has forced bank to depend on non-interest revenue
JPMorgan Chase & Co.
Wells Fargo & Co.
) have emerged as the two most stable banks in the wake of the
2008 crisis. Together, they account for about 44% of the mortgage
volume in the economy. Despite the prevailing soft interest
rates, their sterling performances in the recent quarters are
allowing them to charge customers more in transaction costs.
But the larger issue is that the banking giants - including
Bank of America
Goldman Sachs Group, Inc
) - were supposed to behave differently as a result of the shift
in the Fed's outlook. The idea was that the reaction to any Fed
action would be muted at best, reducing market volatility. But an
unforeseen and possibly unnecessary side effect has been that
there is an excessive focus on the data and forecasts released by
So has the Fed become the centre of attention this time as the
only indicator of the state of the economy which matters in the
end? And has its role as a key policymaker diminished as a result
of these initiatives.
The answer is probably both yes and no. One opinion is that
the promise of a clear long term direction has helped reduce
market volatility and has helped business adopt a clearer long
term perspective. This is the case with banks and other financial
institutions, which see the clear promise of a soft interest rate
regime over the long term.
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
To read this article on Zacks.com click here.
Whether such policy rules have left the Fed with enough room to
maneuver is still up for debate. The ongoing round of bond
purchases has no value or time based constraints which point to a
certain degree of flexibility. But whether this direction is the
right one is too close to call as of now.