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How the Bond Markets React 10.10.05
The Next Candidate
The developing inflation situation is bound to influence who the President picks to fill Mr. Greenspan's spot at the Central Bank. The new Fed chief, despite what the President says, cannot have a policy that differs from the White House. Fighting inflation, an index that rises far more often than it falls will not be welcomed by a banker who believes in any type of Keynesian approach. Keynes would see any inflationary pressures easily resolved through increases in taxation and reduction in government spending. A monetarist Fed chief, one who believes that money supply control is the best method would not find themselves on Mr. Bush's list either. Using monetary policy, this kind of head banker would focus on goals such as constraining inflation, full employment, setting interest rates to discourage or encourage borrowing which would, encourage or discourage expansion.
Expect Mr. Bush's choice will most likely be a member of the school supporting supply side economics. These macroeconomic thinkers see tax cuts and business incentives as the only way to encourage economic growth. These folks focus on production without regard to demand, a belief that if you give the wealthy the incentives, they will reinvest it in the economy and as a result, make it grow. Paul Krugman of the New York Times has referred to this as "a trojan horse for upper bracket tax cuts without economic justification".
Greenspan's replacement will be, as I mentioned earlier, someone who shares Mr. Bush's economic outlook and with whom he can buddy up with should he need to just talk economic turkey. He doesn't need, as evidenced in his pick for Supreme Court Justice, someone of great intellect or renown. The candidates seem to be narrowed down to Glenn Hubbard, the President's former chairman of the Council for Economic Advisors and currently the dean of Columbia University Business School. He is the hand's down favorite if he is willing to leave his academic post for the spotlight once again.
Martin Feldstein has an impressive list of independent credentials and has worked with the President on his attempts at Social Security reform. He was, it should be noted, critical of President Ronald Reagan's deficits when he was employed by him. This independent thinking does not settle well with Republicans so you can assume that his name is on the list as window dressing.
Ben Bernanke, a former Fed governor who was brought into the folds as the President's replacement for Hubbard was an early contender for Greenspan's job and is still a front runner because of his deeply conservative bent. Mr. Bush is not a big fan of free thinkers and because of this, Mr. Bernanke might be overlooked. Unimpeachable independence is not necessarily a White House policy even if Mr. Bernanke fits the description.
Lawrence Lindsey is on the short list of candidates for the job as well. His former post as director of White House National Economic Council does put him in alignment with Mr. Bush's thinking. He is also a former Fed governor tapped to serve the White House's needs.
Other candidates now on the list include Fed Governor Donald Kohn, Fed Vice Chairman Roger Ferguson, and ex-Dallas Fed President Robert McTeer.
Remember, Mr. Bush is open to suggestions but is expected to make a decision as early as November. Until then, we can expect continued short term rate hikes and even more outward concern about inflation.
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