The President is nearing a crossroads – a major crossroads – and what he decides could shake the markets.
No, we’re not talking about health care reform although that could be a game changer too. No, we’re talking about Obama’s decision to either name a new Fed Chief or give Ben Bernanke a second term when his first one expires on January 31, 2010.
Now if you’re like us, you’re probably saying, how will that shake markets? Isn’t one Fed Chief like another?
Not necessarily. A new figure, likely a Democrat, might focus on lowering unemployment while tolerating higher-than-desirable inflation. Such an assumption might lead markets to recalibrate their bets about longer-term securities, sending longer-term interest rates higher.
In addition, while Bernanke has mapped out his exit strategy to pull the economy back from exceptionally low interest rates and extricate the Fed from a flood of loans to financial markets without sparking unwanted inflation, other candidates might chart a different course.
Of course, all this speculation could be moot. Published reports suggest Bernanke’s chances for reappointment at about 80 percent. Also, Obama has publicly praised Bernanke's handling of the crisis - but he’s also stopped short of saying he wanted him to stay on.
And that could signal that his decision will be influenced by the state of the economy in the days and months ahead. Clear evidence the economy is on track for recovery would bolster Bernanke's candidacy and would justify Obama's own decision to fight the crisis with aggressive public spending.
"If the economy fell off the cliff, there would of course be a different view," says Eugene Ludwig, chief executive of Promontory Financial Group. A slow recovery or worse could turn Bernanke into a political lightning rod. The Senate must confirm the president's choice for Fed chairman, and while Democrats control the legislature, significant opposition to Bernanke could derail his renomination.