The Bernanke Post Mortem. Is New Fed Monetary Policy Coming?

With Fed Chairman Ben Bernanke likely to exit his post as head of the Federal Reserve early next year, what does that mean for US monetary policy?

Will his final gesture include a QE taper? Will the impending change in Central Bank leadership make the markets panic? Who will succeed him? What will the Federal Reserve Board look like in 2014? Make no mistake … the future of America's money supply hangs in the balance.

After serving 8 years heading up America’s Central bank, Bernanke’s term ends on January 31, 2014. His legacy, however, may depend upon how his policies ultimately play out. Bernanke’s tenure has seen colliding crises in the stock market, real estate, and the auto industry. During his term America has been plagued by soaring unemployment, plummeting home values, mounting household debt, rising oil and food prices, tumbling consumer confidence, and a profound and pervasive economic malaise.

Bernanke’s position has never been enviable, however. Aside from a set of complex and urgent economic predicaments, there has been the quagmire of Washington politics … the bumping of debt ceilings, the punishing partisanship, the funding show-downs, and the fierce clashes over entitlements. While he may very well be remembered for intervening when Wall Street seemed on the brink, he will also be remembered for accruing historic debt by pumping mountains of cash into America’s banking and finance systems in an effort to prop up the economy.

Bernanke’s policies have been fairly unprecedented. In the annals of Fed Chair history, his strategies are quite unique and his methods reflect an extraordinary use of Federal banking power. His critics reside on both sides of the aisle whether decrying his slow reaction to the pandemic of the subprime housing crisis … or condemning his use of “money printing” as a means of making things better.

Bernanke is not the first Fed Chair to face crisis or criticism. When the “Great Recession” hit it evoked memories of Paul Volcker who combatted the stagflation of the 1970’s with a controversial policy of strict monetary restraint. Likewise, inflation-hawk Alan Greenspan whose interminable 18-year tenure saw the largest market crash in history, the worst terrorist attack ever on American soil, and a legacy tarnished by a perceived lack of oversight.

Like his predecessors, Bernanke has been faced with defining moments that forced the hand of the Fed, and his tenancy will be forever linked to his unique brand of economic remedy. A student of the Great Depression, Bernanke has championed an ultra-loose monetary policy, ultra-low interest rates, and a new concept of “Quantitative Easing,” which has granted the Fed unprecedented power to acquire bonds and mortgage-backed securities to help invigorate the markets. While Wall Street has responded with an historic run, the Fed now sits with trillions of dollars on its balance sheets … and the wisdom of Bernanke’s tactics, ultimately rests with what America does with them.

In a “QE Catch-22,” the Fed is on a slippery slope. If it sells all those bonds too soon, it could dampen the recovery … if it does not sell them soon enough, it could spark massive inflation. Either way, the road ahead could be a bumpy one.