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Stock markets celebrate, but Fed finds reasons to worry about fiscal policy
The Fed also has to be cautious about a major change of course when “some nasty fiscal fights are brewing in Washington,” he said, noting that even as the Fed was meeting, House leaders tied a measure that would fund the government for the next fiscal year to legislation defunding President Obama’s health care reform.
Just as important is the uncertainty hanging over the future of the Fed. Mr. Bernanke is widely expected to retire from the chairmanship when his term expires in January. He declined Wednesday to say whether he is stepping down or would consider staying on if the White House asked.
The president’s top choice to replace Mr. Bernanke, former White House economic adviser Lawrence H. Summers, withdrew from consideration last weekend. Fed Vice Chairman Janet Yellen now is considered the top contender, but some Fed watchers say the White House will want to consider alternatives, including keeping Mr. Bernanke in place.
“One of the factors that clearly has pushed both nominal and real interest rates higher in recent months has been investor concern over the changing fabric of the Fed’s Federal Open Market Committee, and particularly the selection of a new chairman,” he said, noting that any new chairman will have to smooth over “significant divisions” over the direction of monetary policy at a critical time when the Fed is making a major transition to tighter policies in the future.
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