June 3, 2013

Many are speculating that Mr. Bernanke will step down as Federal Reserve Chairman when his current term expires at the end of January.  The latest evidence put forth supporting such speculation is the announcement that, due to a “personal scheduling conflict”, he will miss the important annual Federal Reserve symposium in Jackson Hole this August (the first time a Chairman will be absent in 25 years).  Others cite his March response (“I don’t think that I’m the only person in the world who can manage the exit”) to a question concerning his future as Chairman.

Frankly, the writing has been on the wall for far longer.  Anyone witnessing his 2010 60 Minutes interview or the frequent debates with former Congressman Ron Paul in the House Committee on Financial Services will observe all the signs of someone contemplating resignation.  His responses oscillated between avoidance and annoyance.  His demeanor exuded nervousness and indecisiveness.  In short, this is a man who does not enjoy his job.

And he certainly should not enjoy his job as, especially in the years ahead, the American people will no doubt fail to enjoy his work as well.  The Federal Reserve’s actions under his term have been unprecedented and may have negative consequences without parallel since its inception.  This blog, however, is not devoted to a review of the Bernanke era, but rather a preview of what lies ahead.

Names of candidates are currently being discussed, including former Treasury Secretaries Timothy Geithner and Larry Summers.  But the consensus pick is current Federal Reserve Vice-Chair Janet Yellen.  Perhaps the position was informally offered to her when she joined the Board in 2010.  It seems a real possibility in order to entice her away from her husband and home in San Francisco while stomaching a significant pay cut.  So who is Janet Yellen?

Many refer to her as the most dovish member of the Board.  One could support this by citing her past academic work or referencing her Berkeley credentials, but we do not think such efforts are necessary given her recent speech to the National Association for Business Economics which acted as a microcosm for her economic philosophy.

Entitled “Challenges Confronting Monetary Policy”, Dr. Yellen presented her defense of the Federal Reserve’s actions with a particular focus on its asset purchases.  In detailing the “costs” or risks of these asset purchases, she cited several legitimate concerns such as the “promotion of excessive risk taking” by investors, but she never discussed the possibility of inflation.  The primary risk of the Federal Reserve’s unprecedented money creation is not debated or dismissed, but rather purposely ignored.

WindRock does not believe the risk of inflation can be ignored, and the time to start positioning your portfolio accordingly should be before Chairperson Yellen is sworn in.