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Fed: up?

July 29, 2013

There has been a lot of speculation and tea-leaf-reading with regard to who is going to be named as the new Chairman of the Federal Reserve. Former Treasury Secretary Larry Summers is one name that has been brought up quite a bit, and he would certainly be a stark contrast (at least from a personality/style standpoint) with the more staid, professorial Ben Bernanke. The only other serious contender that I have seen mentioned is Janet Yellen, the current Vice Chairman of the Federal Reserve System’s Board of Governors.
 

Whoever gets the nod, one thing is certain: they will be under a great deal of scrutiny. We have been reminded again in recent weeks how even the smallest and most innocuous comment by the Fed Chairman can cause the market to plunge or spike. Everything the fed does—and everything the chair says—is scrutinized by a jumpy market.
 

While the new chairman will not have much maneuverability, he or she will still be in a position of enormous influence, and they will be coming into a situation where the Fed is, to a large extent, still controlling the stock market through their easy money policies. It might sound counterintuitive with the market setting new highs all the time, but I continue to believe that this will end badly—we just don’t know when. In the long run, the policies we have pursued just are not sustainable. When the fed starts scaling back bond purchases, as they will have to do, taking the wind out of the market’s sails, we are going to find ourselves up against some rocky economic shores.
 

The bottom line is that the Fed has never really been in this position before, and, while I can’t speak to the merits or liabilities of various candidates, I do know that they are going to find themselves in a potentially difficult position when interest rates inevitably start going back up.

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