The short list of candidates for the Fed Chief Appointment was a can't-go-wrong set of options. Still, I am relieved that Bush chose one of them--the frontrunner, no less--and not some unqualified, Harriet Miers-type crony. Ben Bernanke, the nominee, has brilliant academic credentials in monetary economics as well as experience at the Fed, and he has had a brief stint as Chairman of the Council of Economic Advisers. During his days on the Board of Governors, he had a reputation for examining thouroughly and rigorously any economic news and reports that crossed his desk, and for asking very penetrating questions. Anyone who has met him (I met him once, about six months ago) will tell you that Bernanke has a razor-sharp mind. Given all these qualities, I'm sure he'll be a highly competent Fed chairman. Furthermore, he's uncontroversial, he is respected by virtually all economists, and he is not one to put politics above sound economic thinking, so he should breeze through the confirmation process.

I am puzzled by Monday's stock market rally which was attributed to Bush's nomination of Bernanke. The Dow jumped 169 points--its largest single-day increase in more than six months. And there was no other major news, such as statistical announcements, that could have triggerred a relatively large rally. So it seems that the stock market rally was due to the Bernanke announcement, very positive earnings reports, randomness, or some combination thereof. What I don't understand is, what is it about Bernanke, and his expected monetary policy, that could increase the present discounted value of companies' expected future earnings?

Perhaps this line from a corporate chief economist quoted by USA Today says it: "the main reaction will be a sigh of relief that he is one of the mainstream, qualified candidates." So, investors may have been expecting--at least to some degree--a quackish Bush crony, but now Bernanke brings credibility and stability to monetary policy, thus reducing uncertainty. It seems that Bush's selection of Harriet Miers and Michael Brown types has so lowered people's expectations that when he actually picks someone who is qualified and universally respected, he sets off a stock market rally.

Stocks rally on Fed chief appointment [USA Today]

Tags: Economy, Federal Reserve, Ben Bernanke