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COLUMN-Bernanke, the election and risk assets: James Saft

James Saft
WATCH LIVE

Oct 24 (Reuters) - Now we have the pre-election Federal Reserve meeting out of the way, we can go back to worrying about the real issue.

Not who will be president, but who that president will slot in to park in Ben Bernanke's parking spot when his term as Federal Reserve Chairman runs out in January 2014.

The New York Times this week reported Bernanke telling friends he is unlikely to stand for a third term as Fed chief, opening up the likelihood of a new person in the role in 2014 no matter who is elected president.

Markets are jittery about the potential for a transition, and they are right to be. Bernanke's policies, for good or ill, are a good part of the foundation underpinning current risk asset valuations. Anything which increases the chances they will be cut short does, and will, hurt equity valuations.

The Fed, as expected, did little, leaving rates on hold at virtually zero, a commitment they've made until at least mid-2015, and reiterating their pledge to buy $40 billion a month of mortgage bonds. The only change of real note in their statement was an acknowledgement that growth in business investment, in contrast to housing, is on the wane. Jeffrey Lacker, a frequent dissenter, did so again, but the Richmond Fed President will rotate off the slate of voters next year anyway.

You wouldn't expect them to make a big splash just two weeks ahead of the election, and the Fed still has an opportunity at its December meeting to extend its program of buying Treasuries into 2013. They almost certainly will, no matter who wins, as stopping Treasury purchases would be tantamount to a tightening just ahead of the negotiations around the fiscal cliff.

HORSE RACE WITHIN A HORSE RACE

So now back to the incessant horse race reporting on the election, and the sub-set of that of predicting who each candidate would appoint if given the opportunity. There were suggestions that uneasiness over this was in part behind the selloff on markets earlier this week, with particular concern over whether a Romney-shaped Fed would hold with extraordinary measures.

``I would want to select someone who was a new member,'' Romney said of the top job at the Fed in August, and ``someone who shared my economic views''. Romney said he was looking for someone to give ``monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril.''

First off, I wouldn't take Romney's comment about wanting a strong dollar overly seriously. That is likely campaign talk, and his aggressive stance over Chinese currency management shows he is well aware of what makes the U.S. more or less competitive.

Though Romney and his backers have criticized the Fed for being overly loose, this may be an instance where what seems loose when running in opposition seems about right when presiding over the economy, and possibly over some deepish cuts in spending.

Far better from an incumbent's perspective to let the Fed stay loose and be able to take credit for any progress on the budget than to find your job of cutting deficits made more difficult by contractionary monetary policy.

All of this argues that a Romney White House is more likely to appoint a Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush, or a Gregory Mankiw, who succeeded Hubbard in that job, than a John Taylor, the Stanford economist and Fed critic.

And that's if Romney gets the job. Polls and betting exchanges still seem to favor Obama, and a second term would likely result in a Fed chief who is another shade of Bernanke, in other words more of the same.

To be sure, there are few people with fuller credentials than Bernanke to oversee extraordinary monetary policy, and certainly none with a stronger motivation to see these policies vindicated.

As such, almost no matter whom a second-term Obama nominates as the new Fed chief, this person will represent a risk, at least from the point of view of those who are long riskier assets. Unless it was a famous dove, and it won't be, the new Fed chairman just might be less entrenched in his or her commitment to quantitative easing.