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Is It Time To Bounce Bernanke?

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.

Market Moving?

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.

If Not Bernanke…

“If we want to start down the path of responsibility we need to find somebody new,” says celebrated contrarian investor Bill Fleckenstein on Fast Money. Fleckenstein has been an outspoken critic of the Fed so it’s no surprise he advocates a new Fed Chief.

And make no mistake, strong candidates are waiting in the wings -- White House aide and former Treasury Secretary Lawrence Summers, San Francisco Fed President Janet Yellen, and former Fed vice-chairmen Roger Ferguson and Alan Blinder -- Obama may be tempted to claim one of the most important jobs in Washington for his own party.

The president could aim to make history by naming Yellen as the first woman, or Ferguson, as the first African American, to run the central bank.

Watch and Wait

Although Wall Street would like a decision yesterday, it seems likely the White House will take a watch and wait attitude. And that could make investors anxious. “If you get beyond August without an announcement, the markets will begin to get nervous," said Camden Fine, the president of the Independent Community Bankers of America.

When will we know?

Taking history as a guide, a public announcement could be delayed until late October. That is when former President George W. Bush announced his replacement for Alan Greenspan in 2005.

Should Obama appoint Ben Bernanke for a second term as Fed Chief?

What do you think? We want to know?



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Trader disclosure: On Aug 19th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Finerman's Firm Owns (BAC) Preferred Shares, Finerman Owns (BAC) Preferred Shares And Owns (BAC); Finerman's Firm Owns (WFC) Preferred Shares And Is Short (WFC), Finerman Owns (WFC) Preferred Shares; Finerman's Firm Owns (MSFT), (TGT), (WMT), (HPQ), (SYK); Finerman's Firm Is Short (IYR), (IJR), (MDY), (IWM), (SPY), (USO); Terranova Owns (AMZN), (MSFT); Terranova Is Short (AVB); Seymour Owns (AAPL), (AA), (BAC), (UNG), (POT); Seygem Asset Management Owns (YGE); Seygem Asset Management Is Short (FXI); Najarian Owns (BAC); Najarian Owns (C) Calls; Najarian Owns (CIEN) Calls; Najarian Owns (FCX), Owns (FCX) Put, Is Short (FCX) Calls’ Najarian Owns (HPQ) Calls; Najarian Owns (INTC); Najarian Owns (MS) And Is Short (MS) Call; Najarian Owns (MSFT) And Is Short (MSFT) Call; Najarian Owns (UBS) Calls’ Najarian Owns (YHOO) Call Spread; Najarian Owns (POT) Call Spread; Najarian ;wns (PALM) Calls

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CNBC.com with Reuters