Wednesday, June 24, 2009

What to watch at the Fed

As the markets intensely scrutinizes the upcoming FOMC statement, I will instead be watching for Obama’s statement on the appointment of the new Federal Reserve chair in the days to come as a far more important clue to long-term market direction.

Currently, intrade shows Bernanke to be the front-runner to be re-appointed as Fed Chairman when his term expires in January 2010. The fate of Helicopter Ben will be an important clue to future policy.

Where is Paul Volcker?
Remember the stories during the campaign about how Paul Volcker added gravitas to the Obama economic team? As Obama became president, Volcker’s voice seemed to get downgraded.

Given Volcker’s age, it is highly unlikely that he would be the next Fed chair. However, with the yield curve steeply upward sloping and inflationary expectations elevated, this may be an appropriate time to consider reducing the level of monetary stimulus.

It would take a “damned the torpedoes” Volcker clone to be brave enough to take away the punch bowl just as the party is starting to get going, especially in the face of severe political pressures and sensitivities.

If Bernanke is re-appointed, then it will be a definite signal to take a ride on the commodity train.

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