Experts Talk Bernanke, Obama's Reform, Rising Risk

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Jan. 22.

Action Economics

Senator [Barbara] Boxer (D-Calif.) said she will not support Ben Bernanke for a second term as Federal Reserve chairman, saying "it's time for a change." This is the fourth senator to oppose Bernanke publicly and means that more Republicans will have to come to his side for him to win confirmation. Finance Committee Chairman [Senator Max] Baucus (D-Mont.) indicated he still believes Bernanke will be confirmed. "I can't give you a date, but clearly he will get confirmed," Baucus said. Uncertainty over the Fed chief's fate will keep the financial markets and the dollar on shaky ground.

President Barack Obama endorsed Bernanke as the "best person to lead the Fed," according to White House sources, expressing confidence that he will be confirmed by the Senate for a second term. But it's not at all clear the votes are there and that Obama's endorsement will do Bernanke any favors after the Massachusetts setback. Bernanke will have to plead his case on its own merits, possibly next week, which may well detract from the Federal Open Market Committee decision, since Bernanke will be a lame duck chairman unless confirmed by Jan. 31.

Russell Jones, RBC Capital Markets

The highlight in the coming week is the [Jan. 26-27] FOMC meeting. We expect little change to the FOMC statement. Chairman Bernanke and Vice-Chairman [Donald] Kohn both recently reiterated a cautious stance on the economic backdrop. Kohn in particular was rather emphatic about the challenges that remain and the need for keeping the funds rate low for an extended period. Indeed, New York Fed President [William] Dudley stated recently that extended period means "at least six months." From that perspective, unless the backdrop improves quickly, meaningful changes to the statement are not at hand.

Kerri Maddock, Barclays Capital

We expect no major changes to the FOMC statement [on Jan. 27]. We look for the committee to continue to indicate that it believes economic conditions will warrant exceptionally low levels of the federal funds rate for an extended period, and to repeat that it expects to complete its purchases of agency debt and agency mortgage-backed securities by the end of the first quarter of 2010. While much discussion at the meeting is likely to revolve around the Fed's exit strategy, we do not expect such discussion to be reflected in statement changes. If a mention of the exit strategy were added, market participants might take it as a signal that the Fed's exit from stimulative policies would commence soon, and we think the Fed is not yet ready to send such a signal.

Brown Brothers Harriman

A new factor was injected into the market [on Jan. 21] when President Obama spoke on bank reform. In the big picture, we have argued that while the U.S., like the euro zone and large countries such as China, has problems, it is in a better position to deal with those than regions such as the euro zone. This discrepancy has been highlighted in recent days. The euro zone has not resolved the Greek issues, and China's lack of transparence, rule of law (e.g., Google (GOOG)), and excess bank lending last year are coming home to roost. This has provided a strong U.S. dollar backdrop. Now the U.S. Administration has introduced a new factor to the fray—uncertainty after Obama's speech. The initial reaction has been that near-term, long dollar positions appear to be being reduced, helping to support the foreign currencies this morning, but it is a judgment call on which direction the dollar takes in coming days.

Juan Esteban Valencia, Société Générale

A plethora of news items this week heightened event risk and caused the financial markets to go through a period of reassessment. The ongoing doubts over Western Europe sovereign risk, the acceleration and potential overheating in China, and the new bank proposals from President Obama caused a severe correction in equities but less in government bonds and credit. In the near term, markets will probably remain volatile until there is more clarity regarding the aforementioned situations, but we expect credit spreads to go back to business-as-usual and eventually continue their tightening trend. If anything, the current uncertainty should impact equities more and benefit [investment-grade] credit, given its more certain cash flows and security, and also given that it offers higher yields than government bonds.

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