Ex-Fed Chairman Bernanke 'puzzled' by market indifference to political risk

[May 18, 2017]  By Lawrence Delevingne and Svea Herbst-Bayliss

LAS VEGAS (Reuters) - Former Federal Reserve Chairman Ben Bernanke said on Wednesday that he is "puzzled" by how little markets have reacted to major political risks, and skeptical about the Trump administration's ability to fulfill its pledges to stoke faster growth.

"It puzzles me that markets are very blasé about political risk until the last minute," Bernanke said during a discussion on stage at SALT, a financial industry conference in Las Vegas affiliated with Skybridge Capital.

Even so, Bernanke said he expects the Fed to keep hiking interest rate targets in the near term as the U.S. economy continues to grow.

The biggest political risk is heightened tensions between the United States and North Korea, Bernanke said. And while no major trade war has "blown up," that is also something "we have to keep a close eye on," he added.

As Bernanke was speaking, major U.S. stock indexes were headed for their biggest declines in more than eight months on news reports that President Donald Trump may have tried to interfere with a federal investigation.

Despite the one-day blip, markets have generally been rising for months with historically low volatility despite a host of scandals and frequent provocative statements from the White House and Trump's Twitter account. Among other things, Trump has at times vowed to change U.S. trade policies with China and Mexico, as well as the North American Free Trade Agreement (NAFTA).

Bernanke said he is not certain the Trump administration will accomplish infrastructure improvements and an overhaul of the U.S. tax code any time soon. Delivering on those early promises "will be harder now" Bernanke said, pointing to Trump's low approval ratings.

Ben Bernanke, former chairman of the Federal Reserve, speaks at the SALT conference in Las Vegas, Nevada, U.S. May 17, 2017. REUTERS/Richard Brian

Bernanke chaired the Fed for eight years and oversaw the U.S. central bank's response to the 2008 global financial crisis. That involved unprecedented measures, like setting interest rates near zero and flooding markets with trillions of dollars of liquidity.

He is now an economist at the Brookings Institution and an adviser to hedge fund manager Citadel and bond fund manager Pimco.

Bernanke's successor, Janet Yellen, stepped into the role in 2014 and has overseen a gradual raising of interest rates as the U.S. economy has improved. Bernanke predicted rates will continue to rise "very slowly" and said Trump should re-nominate Yellen, whose term is up next year.

Bernanke expects "moderate growth" to continue for some time, but warned a correction is likely in the next four years from a statistical standpoint.

"Over the next four years," he said, "there is a pretty good chance we'll have a downturn."

(Reporting by Lawrence Delevingne and Svea Herbst-Bayliss; Writing by Lauren Tara LaCapra; Editing by Meredith Mazzilli)

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