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Mixed response as Bernanke named Greenspan successor

The appointment of President Bush’s top economic adviser Ben Bernanke to succeed Alan Greenspan as US federal reserve chairman has sparked a mixed response from the investment community.

As bond markets in the US weakened and equities strengthened on the announcement, Baring Asset Management warned that Bernanke’s reign could bring further volatility to US inflation. Director of fixed income Toby Nangle says the appointment has reinforced Baring’s negative view of the dollar, after the US bond market sold off heavily on the news.

Nangle believes the higher rates priced in next year since the announcement may reflect the market’s view that Bernanke will be forced to adopt a tightening stance to gain credibility as an inflation beater.

But Nangle says Bernanke lacks Greenspan’s credibility and may struggle to command the board, with Fed governors’ aggressive statements on inflation conflicting with his more cautious tone.

Fidelity is more positive and says the appointment removes some of the uncertainty in the market. But senior fund analyst Anne-Sophie Girault says the greatest uncertainty remains the impact of high oil prices on the economy, possibly triggering higher inflation and/or slower growth, with talks of emerging stagflationShe says: “More positively, the earnings season has so far been reasonable. This should provide some support as market conditions show that fundamentals have been driving share prices since the beginning of the year.”

Nangle says: “We were surprised that the markets reacted so strongly to the news, particularly given that Bernanke has been seen as the clear favourite to succeed as Fed chairman for months.

Hargreaves Lansdown investment manager Ben Yearsley says: “It sounds like he is more cautious on interest rate rises, which should be a good thing for corporate America.”

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