SAN FRANCISCO — The U.S. economy has some shaky elements, but
Federal Reserve Board Chairman Ben S. Bernanke’s track record still is rock solid, according to financial advisers, chief economists and other executives in the investments industry.
Low unemployment, low inflation, a strong stock market and the resilient economy prove the point, they contended.
“I would say he’s better than [predecessor Alan] Greenspan, because he’s not an alarmist,” said Douglas L. Nelson, president of AQN Advisors Inc., a Reno, Nev., firm that manages $300 million. “He’s brought stability” by holding the benchmark federal funds rate at 5.25% since last July, Mr. Nelson said.
“His communications are much more transparent, and he’s much more forthright than his predecessor,” said Don Shute, research analyst with IMS Capital Management Inc., a Portland, Ore., firm that manages $750 million. “Listening to Greenspan was like [reading] press releases.”
But with mortgage rates and long-term-bond yields starting to spike in recent weeks, some investment experts think that — transparency and stability aside — Mr. Bernanke’s days of sitting tight are numbered.
Top executives at Pacific Investment Management Co. of Newport Beach, Calif., said that the next rate move needs to be a cut, according to Mark Kiesel, executive vice president and portfolio manager.
“Housing is about to grind to a halt,” he said. “The Fed is aware of this” and needs to cut rates to mitigate its effects.
But Brian Wesbury, chief economist for Lisle, Ill.-based First Trust Advisors LP, which manages $30 billion, said that rates need to be raised during three consecutive meetings of the Fed’s monetary policymakers — the next three are this week, August and September — to reach 6%, from the current rate of 5.25%.
“The one thing that kills Fed chairmen is losing credibility on inflation; he hasn’t whipped inflation yet,” he said.
“[The Fed] held [steady] too low, too long,” Mr. Wesbury added. “They raised rates too slowly, and they stopped short.”
The Fed raised rates 17 times in 25 months, starting in June 2004 and ending in July 2006.
But Ken Fisher, chief executive of
Fisher Investments Inc. in Woodside, Calif., which manages $41 billion, said that the next U.S. president will be elected before the Fed messes with rates.
“[Mr. Bernanke] has a real vested interest in not [irritating] the next president or becoming a political issue,” he said. “If I were him, I would do nothing, because anything he does, he’s going to be blamed.”
“If he raises rates, he might get away with it, but what does he get out of it?” Mr. Fisher asked.
But a better reason not to expect a rate hike is that de facto ones already are in place, according to Kurt Hoefer, a portfolio manager for The Golub Group LLC of San Mateo, Calif., which manages $550 million.
“Ultimately, they’re tightening credit at the level of the lending institution,” he said. “By making pronouncements and suggestions to member banks, [the Fed] has caused dramatic tightening of credit.”
These actions are a far more artful means of taming inflation than by instituting an actual rate change, Mr. Hoefer added. “By changing rates, there can be unintended consequences in a market that isn’t on the firmest footing,” he said.
But tightening of credit is exactly what the housing market can’t sustain right now, Mr. Kiesel said. “The media has not done a good job of highlighting that the housing problem is going to get worse,” he said.
About $1 trillion of adjustable-rate mortgages are about to reset upward, and mortgage rates are rising at a time when the home-vacancy rate already is at an all-time high of 2.7%, Mr. Kiesel said.
But if Mr. Bernanke stands pat, it’s simply a measure of his faith that markets will correct themselves, Mr. Nelson said.
“If anything, the history of the Fed has been to overreact,” he said. “The market tends to do pretty well if you just leave things alone.”
