Daily Archives: January 31, 2014

Macro Focus — A Changing of the Guard at the Fed

Fri, JAN 31st, 2014

I find the below table, put together by the folks over at Strategas Research, very interesting.

There have been fourteen chairmen since the Federal Reserve was sanctioned by Congress in December 1913 to stabilize the banking system [and thus the economy]. From the below data, Paul Volcker was arguably the best chairman in terms of absolute stock market performance [CAGR]. I say this because even though his annual returns aren’t the highest of the group they are very impressive and over a much longer period of time [Hamlin’s number beat Volcker’s, but he was only running the show for about two years]. It is also worth noting that Volcker’s brash policies broke the back of pesky inflation — which plagued the economy and markets all throughout the 1970s peaking at ~13.5% in 1980/81 — and helped set the stage for economic growth. He did this by first hiking aggressively the federal funds rate from August of 1979 through 1981 [from 11% to 20%] before pivoting in 1982 steadily dropping rates in order to help grease the gears of the economy. As a result, great stock returns followed as inflation came down and real economic growth went up. This created a virtuous cycle that persisted for years.

Greenspan and McChesney Martin hold the longest tenures [each at nearly nineteen years] and both have laudable stock market CAGRs over this exhaustive period. Impressive, to be sure.

More recently, Ben Bernanke’s +5.2% CAGR looks mediocre at first blush. Nevertheless, I place him as likely the greatest central banker in the history of the Fed. First, let us agree that a Fed chairperson’s greatness should not be measured by stock market returns alone. Second, returns over Bernanke’s eight years are quite misleading in my view and do not fully capture his positive contribution to both the real economy and financial markets. For if it were not for Bernanke’s courage and diligence in deploying progressive, unorthodox monetary policy over the past several years the U.S. financial system [and thus the economy] may not have made it through the crisis. Some may call this hyperbole, and that’s fine. We can never truly know what would have happened had we charted a different [policy] course. But those same skeptics must also recognize that had it not been for Bernanke’s bold policies the economy and markets would be far behind where they are today, at the very least. Mr. Bernanke’s last five years in office [2009-2013], the direct period beholden to these intrepid policies, show a stock market CAGR of closer to +19%! With context to his spot on the table, this five-year performance number vaults him to second place. I assert that this is a germane lens through which to view Bernanke’s most critical body of work. Indeed, it is a reflection of the vast strides the economy and the business cycle have taken post-crisis.

Across these fourteen Fed shepherds the mean chairmanship has lasted about seven years; the median is five years; and the mode is bimodal [i.e., not unique] at three and eight years. It will be interesting to see what Janet Yellen is able to do as she officially begins her work as the first chairwoman of the Fed. I suspect that a big part of her legacy will be in her first act — how deftly she manages the exit from the extraordinary monetary policy of her predecessor.

I ponder these things as Ben Bernanke wraps up his final day at the helm after eight years. It was a wild ride to say the least. In financial markets there were ups, then [dramatic] downs, and finally a return to [dramatic] ups. And in close correlation the economy grew, then broke, then gazed into the abyss only to be pulled back from the brink, and has since recouped all of its lost output [though we remain below our economic potential]. Banks, at the heart of the crisis, went from complete disasters to the healthiest they’ve been in years. Meanwhile, politicians controlling fiscal policy have made smooth economic progress nothing short of a major challenge. This made Bernanke’s job increasingly difficult.

Along the way Ben attracted many critics and amassed a legion of supporters. Monetary policy is now on the path to normalizing and his chairmanship has officially ended. I suspect that only time will provide the truest bench from which his legacy is to be judged in the court of public opinion.

I thank Bernanke for his service to the economy.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200