A Bernanke exit might complicate Fed's pullback

[June 25, 2013]  WASHINGTON (AP) -- The Federal Reserve expects to start slowing its bond-buying program this year just before it might need to manage another major transition that could spook investors: the likely exit of Chairman Ben Bernanke.

Bernanke is expected to step down in January. By then, financial markets will likely be absorbing a pullback in the Fed's bond purchases, which helped push long-term interest rates to record lows. Bernanke said last week that the Fed expects to slow its bond-buying later this year -- and end it next year -- if it thinks the economy can manage without it.

Bernanke hasn't said he'll leave in January, when his second term ends. But he's widely expected to step down then. Among several possible successors, most Fed watchers think the leading candidate is Vice Chair Janet Yellen.

As chairman, Yellen would likely aim to carry on Bernanke's policies. Even so, economists say a shift in leadership at such a delicate time might rattle investors.

"We know for sure now that Bernanke is a lame duck," said Sung Won Sohn, an economics professor at California State University. "The leadership change at the Fed will add to the uncertainty in the markets at a time when the Fed is trying to navigate the transition from easy money to a less accommodative stance."

Even before he leaves, the expectation that Bernanke has just a few months left as chairman could raise doubts about his policies, even though Yellen would be expected to push the same policies.

Investors' panicky response since Bernanke said the Fed will likely slow its stimulus later this year -- if the economy is sturdy enough then -- showed what could go wrong if a leadership transition is poorly managed.

The possible overlap between a Fed pullback in bond purchases and a new chairman "will compound the uncertainty and possible market volatility," said Brian Bethune, an economics professor at Gordon College in Wenham, Mass.

Mark Zandi, chief economist at Moody's Analytics, said the Fed will probably learn from the distress it caused investors with Wednesday's word of a likely pullback in bond purchases this year. Many investors had thought -- or hoped -- the Fed would wait longer.

"They went too far and too fast," Zandi said. "The lesson for them is to move more incrementally with regard to their communications."

Most economists say the administration will strive to avoid any surprises in its handling of Bernanke's expected exit. Yellen is seen as a comforting choice, given that she's considered a like-minded Bernanke ally who has held the No. 2 post at the Fed since October 2010, said Diane Swonk, chief economist at Mesirow Financial.

Yellen led the Fed's communications committee, which recommended many of the changes the central bank has made to make the Fed more publicly transparent.

"Investors are fully anticipating that Bernanke will leave when his term is up and that Yellen will succeed him," Zandi said. "If that happens, I think there will be a smooth transition."

Yet in the meantime, the perception that Bernanke has just a few months left could raise doubts about his leadership.

"When you are a lame duck, people are not as willing to follow you," Sohn said. "It could be more difficult now for Bernanke to mobilize the Fed to march to his tune."

Bethune said he's holding out hope for intervention from President Barack Obama to help calm investors during a precarious time.

"I am hoping that Obama will do anything and everything to convince Bernanke to stay for another term," Bethune said.

[Associated Press; By MARTIN CRUTSINGER]

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