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Wednesday October 19, 2005 - 13:09:10 GMT
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Drum Roll....The Next Fed Chairman

I think it is no secret in Washington that President Bush will name a successor to Chairman Greenspan in November and try and get the Senate to confirm before Congress recesses in December. Indeed the USA Today, today, reported that a White House official involved in the search indicated there would be a selection announced in early November.

No one has a strong clue on who it will be and President Bush is known for surprises when it comes to key nominations...Supreme Court Justice Nominee Harriet Miers is the latest example (this was a pure Bush selection whereas Roberts was very much sold to the President by his top advisors). And Bush insiders seem to have a leg up on more obvious choices. So on this line of thinking we have heard names from Larry Lindsay (fired by the President but still very much a Bush41 and Bush43 insider), Don Evans (former Commerce Secretary and a longtime close personal friend of the President) and Phil Gramm (former Texas Republican Senator). But since the President recently said the next Fed Chairman must be independent (of politics), he himself has ruled out any of these candidates, in theory. And all of these insiders would face tough confirmation hearings...a distraction the White House could do without considering what it faces with Miers.

So for lack of any better sourced ideas, the cast of likely Fed Chairmen include Bernanke (still leading the pack), Hubbard (distant second), Feldstein (outsider), Kohn (insider of Greenspan's) and Ferguson (least likely of the legit candidates).

Bernanke has the street academics, with other central bankers and by now with the markets. Most polls of economists show Bernanke as most likely and most deserving. His confirmation would be painless and quick. Where Bernanke falls down is on camera...he does not exude confidence and at times stumbles for words...he is awkward on live TV. Also it is not clear how ready, willing and able Bernanke is to toss economic principles away for the sake of winning the political battle of the day. Frankly I do not see him as a great advocate of Bush fiscal policy now that he is the top White House economist - Chairman of the Council of Economic Advisers (normally a team of 3 including the Chairman). Bernanke is widely seen as a deflation fighter and not an inflation warrior. So for better or worse he is perceived as more dovish than Greenspan (who was perceived as more dovish than Volcker). Bernanke may end up taking himself out of the running because Bush does not get that warm feeling when he "looks into his heart". Still I have no reason to think Bernanke will not get it...he was brought to\ the White House to get the political imprint, a necessary but not sufficient condition for being named Fed Chairman. I would imagine that Bernanke is less the centralist that Greenspan is and hence the FOMC would become more open to debate and conflicting opinions. No confirmation problem here.

Hubbard, head of Columbia Business School, is my number two. He is telegenic, or un-Bernanke on camera. He and Bush got along (when Hubbard
was Chairman of CEA). He has the respect of academics and business. He does not have the Wall Street familiarity and this could hurt him. He is also young and may not be as capable of commanding FOMC meetings and monetary policy in the same mold as Greenspan...policy of one. I have also heard that Hubbard shares much of Bush's religious conviction. I think Hubbard would be seen as having dovish tendencies. One could imagine the FOMC becoming more democratic and divided. No confirmation problem here.

Feldstein, Harvard Econ Prof, is perhaps the best known of the bunch...though Wall Streeters need to be north of 40 to really remember
Marty. He commands respect in academics, Washington (both sides of the Hill), business and finance. He has demonstrated political independence in
the Reagan administration when he broke ranks with the President as CEA Chairman over the budget deficit. Feldstein could have confirmation
problems because he is on the board of AIG and former CEO Greenberg seemed to get carte blanche on running the firm and compensation. And I suspect Feldstein's inflation credentials would be regarded by markets as considerable. Feldstein surely would retain control over the FOMC in the Greenspan mold.

Kohn, who I like to refer to as Klone, is as close to getting Greenspan to extend his stay without having Sir Alan remain on as Fed Chairman. Sorry if that sounds awkward. What I am saying is Kohn is the only candidate that could conceivably replicate Greenspan's risk management style of monetary policy (ad hoc, data driven and flexible) and keep FOMC meetings as the discretion of the Chairman. Kohn for instance would not allow other Board members to use staff to build evidence for alternative views on policy and the economy. And it is no secret in Washington that Greenspan is pushing for Kohn (hence the Klone). I think Bush wants more Bernanke than Kohn - Kohn would be less easily led when Bush needs support for key legislation on the Hill. I suspect Kohn would be less willing than even Greenspan to appear lending support to things like unfunded tax cuts.

Ferguson is someone I would not list on any short list but he often is so I feel obliged to comment. He is an unknown even though he has spent years as the Fed Vice Chairman. He rarely comments on policy and the economy (Tuesday was an exception). Best I can tell he has not cultivated relationships with Wall Street or business. I have no reason to doubt his skill set and competence, but he does not seem destined to be the next Fed Chairman. He is a Clinton appointee as well. Enough said.

And in any consideration given the track record of Bush on appointments (plenty of surprises) I think it is not unreasonable to leave a fill in the blank on any other words someone no one has thought of or named as a potential successor. Robert Rubin (just a notion...not likely, even as a long shot). Jim Baker. Nancy Lazar.

In any event, the next Fed Chairman will have some work to do to win market confidence. And if I am right about the next three FOMC meetings that Greenspan will reside over, look for another 75bps in tightening. This means that the new Fed Chairman will come to his or her first meeting with loads of pressure to tighten...making four in a row. It would also likely mean that the Fed moves from neutral to restrictive (barring a major derailment of the expansion...I still think the economic expansion has a weak foundation and could be easily derailed).

David Gilmore


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