Bernanke Presses Lawmakers to Resolve Fiscal Cliff

Federal Reserve Chairman Ben Bernanke was in New York City Tuesday to send a message back to Washington: Cut a deal to avoid the fiscal cliff, and don’t play politics with the federal debt limit again.

Confusion over the course of U.S. tax and spending policy is weighing on the spending decisions of households and businesses, as well as on financial markets, Bernanke said in remarks to the New York Economic Club.

“Uncertainty about how the fiscal cliff, the raising of the debt limit and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions, and may be contributing to an increased sense of caution in financial markets,” he said.  Economists say the most visible sign of uncertainty over the fiscal cliff is in the lack of capital-spending growth since the summer.

Orders for nondefense capital goods excluding aircraft, a key metric of demand, was flat in September after a 0.2% gain in the prior month. This came on the heels of close to an 8% slide in June and July.

“Such uncertainties will only be increased by discord and delay,” according to Bernanke.  He urged the members of Congress not to kick the can down the road. Putting off policy choices would only “prolong and intensify these uncertainties,” he said.  “In contrast, cooperation and creativity to deliver fiscal clarity — in particular a plan for resolving the nation’s longer-term budgetary issues without harming the recovery — could make the new year a very good one for the American economy.”

Without action by the White House and Congress on the fiscal cliff, about $500 billion in spending cuts and tax increases are set to begin in 2013. Economists, the Congressional Budget Office, and Fed economists have warned that America could slip back into recession if the so-called fiscal cliff is not addressed before the end of the year.

In a question-and-answer session, Bernanke warned that Fed policy could not protect the economy if it goes over the cliff.  “I don’t think the Fed has the tools to offset that,” he said.

Betting on Housing Market Recovery

Low interest rates and the Fed's efforts to curtail unemployment all point to a likely housing recovery. Ben Bernanke disclosed in September that the Fed continues to purchase mortgage-backed securities that will put downward pressure on mortgage rates--thus increasing refinancing at lower rates and boosting overall demand for housing. Housing prices are also starting to build up, indicating an increase in demand. Hurricane Sandy is further boosting new-housing and repair demand on the East coast. Bloomberg reports that construction in the US is growing at the fastest rate in four years. With all these indicators pointing to an improving housing sector, needless to say, now may be the right time to bet on it. 

One housing market company destined to win in this recovery is Home Depot (NYSE: HD), the largest home-improvement retailer in the world. Home Depot reported its third quarter earnings the day before yesterday. The retailer reported Q3 EPS of $0.74, which beat analyst forecasts by $0.04, and revenue of $18.1B, which beat forecasts by $150M. The stock closed at $63.38 the same day, close to its 52 week high which is the highest the stock has reached in over a decade.

Home Depot's CEO, Frank Blake, yesterday reaffirmed that housing is now becoming “an asset rather than a negative.” According to Home Depot's CFO, Carol Tome, housing turnover this year is about 4.5 million units on an annualized basis which is impacting the company's comparables about 50 basis points this year.

Bernanke Successor May Face Challenges

President Barack Obama's next choice to head the U.S. Federal Reserve could have his or her hands tied if Ben Bernanke and company continue to re-write the policymaking rule book at their current clip.

Under Chairman Bernanke, who is expected to step down when his current term expires in January 2014, the U.S. central bank has embraced the goal of making the historically shrouded business of setting monetary policy far more transparent. It has adopted a string of new rules and guidelines to clarify its policy intentions, including an inflation target and a conditional vow to hold interest rates near zero until at least mid-2015.

The next step is being hotly debated now. Fed policymakers are striving to agree on a set of economic variables, or thresholds -- probably particular levels of unemployment and inflation -- that would signal when the time to raise interest rates was finally drawing near.

The trick is making a credible commitment that convinces investors to keep longer-term borrowing costs low, thus
stimulating the economy, while at the same time ensuring the Fed can react swiftly to changing economic realities. The concern is that these rules and guidelines will crimp the central bank's flexibility in years to come as it deals with
the fits and starts of a protracted U.S. economic recovery. "The more they do it over the next year, the more the next
chair will be constrained," said Vincent Reinhart, chief U.S. economist at Morgan Stanley and a former Fed economist.

The "constructive ambiguity" the central bank has famously used over the years to safeguard its policy-setting discretion is slowly disappearing, he said.

Bernanke Likely Won’t Seek Third Term as Fed Chairman

Federal Reserve Chairman Ben Bernanke has told close friends he probably will not stand for a third term at the central bank even if President Barack Obama wins the November 6 election, the New York Times reported.

Republican presidential nominee Mitt Romney has already said he would not re-nominate Bernanke if he wins the presidency. Bernanke’s term as chairman ends in January 2014.

Bernanke, who was first appointed to run the U.S. central bank by former president George W. Bush and was given a second term by Obama, has declined to comment publicly on whether he would accept another four-year term.

“I am very focused on my work, I don’t have any decision or any information to give you on my personal plans,” he told a news conference last month after the Fed announced a new and open-ended round of bond buying to support the U.S. economy.

The Fed’s unconventional efforts to spur growth have been criticized by many Republicans and some economists who argue that they threaten future inflation and abet profligate spending in Washington.

Treasury Secretary Timothy Geithner has already made it clear he wants to leave by the end of the year.

Former Treasury Secretary Lawrence Summers would be at the top of Obama’s list to replace Bernanke, although his reputation for not being a team player could count against him, New York Times columnist Andrew Ross Sorkin wrote.

Longer shots include Janet Yellen, the vice chairwoman at the Fed, and economist Alan Krueger, a former assistant secretary of the Treasury for economic policy, or even Geithner, Sorkin wrote in his “Dealbook” column.

Glenn Hubbard, who headed the Council of Economic Advisers under George W. Bush, is often mentioned as Romney’s most likely nominee for the Fed chairmanship or the top job at the Treasury Department.