Pennsylvania Investment Observer

Passing the Baton

by Daniel J. Nestlerode

It is now official. President Bush has nominated former Federal Reserve Board member and head of the President's Council of Economic Advisors, Ben Bernanke to assume the position of head of the Federal Reserve Board. Dr. Bernanke will replace, if confirmed by the Senate, the retiring Alan Greenspan, who has guided the Fed for the past eighteen years. And if Joe Paterno can hold on until January 31st 2006, I will win the bet that Greenspan will have retired before Joe Paterno. Of course, Joe is having a much better year than Alan. Paterno's efforts now have the Nittany Lions at 7-1, and ranked in the top twelve college football teams, depending on the poll you select, whereas Greenspan has been increasing interest rates relentlessly for the past year.

Initially, it seems that Bernanke will follow the policies of Greenspan, quelling incipient inflation and preserving the value of the dollar. As Bernanke begins to put his mark on the Fed, I expect less of the obfuscatory language used by Greenspan and a more direct, clearer message from the Fed. Of course, the office many times molds the office holder and I might be very wrong on that issue. In the past, however, Bernanke has written and spoken with clarity about economic issues.

Wall Street apparently loved the appointment, rising 170 on the Dow Jones Industrials and similar amounts on other broad market averages. Indeed, it was the best market rally in six months! The appointment removes a source of anxiety for investors, as many on Wall Street view Bernanke as a known quantity. The markets can again turn their attention to corporate profits, mergers, acquisitions, dividends and share buy-backs, the kind of issues on which investors thrive. And perhaps, just perhaps, this appointment will be enough to spur a fourth quarter rally in stock prices.

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