Since its birth a century ago in 1913, the Federal Reserve System has had only 15 Chairmen, including the newly installed Janet Yellen, who formally took office on February 1, 2014.
Remarkably, as shown in Figure 1, 14 out of 15 of these distinguished appointees have been faced with a major geopolitical, economic, and/or market challenge during the first year of their terms.
Charles Hamlin, the first Fed Chairman, took office only days after the onset of World War I in August 1914. More recently, Alan Greenspan was confronted barely two months into his first term by the sudden equity crash of October 19, 1987. At first, the newly departed Ben Bernanke seemed to escape the "freshman year effect," with a smooth 2006 for capital markets. But by early 2007, the antecedents of the Great Recession had become apparent. And arguably, Chairman Bernanke went on to face the greatest crisis to hit any Fed Chairman with the onset of an oldfashioned credit panic in September 2008.
Figure 1 // Fed Chairman and Their Challenging Freshmen Years
|FED CHAIRMAN||TENURE AS CHAIRMAN||FIRST YEAR CHALLENGE|
|Charles S. Hamlin||August 10, 1914 – August 9, 1916||World War I Begins in August 1914|
|W.P.G. Harding||August 10, 1916 – August 9, 1922||World War I: U.S. Enters War in 1917|
|Daniel R. Crissinger||May 1, 1923 – September 15, 1927||Post – War Inflation; Florida Real Estate Bubble|
|Roy A. Young||October 4, 1927 – August 31, 1930||Speculation in Equities|
|Eugene Meyer||September 16, 1930 – May 10, 1933||Great Depression Arrives|
|Eugene R. Black||May 19, 1933 – August 15, 1934||Great Depression Deepens|
|Marriner S. Eccles1||November 15, 1934 – January 31, 1948||Great Depression Lingers|
|Thomas B. McCabe||April 15, 1948 – March 31, 1951||Cold War Begins|
|Wm. McC. Martin, Jr||April 2, 1951 – January 31, 1970||Korean War Intensifies|
|Arthur F. Burns2||February 1, 1970 – January 31, 1978||Recession/Dollar Fall|
|G. William Miller||March 8, 1978 – August 6, 1979||Inflation Peak in 1970s|
|Paul A. Volcker||August 6, 1979 – August 11, 1987||Inflation/Iranian Revolution|
|Alan Greenspan3||August 11, 1987 – January 31, 2006||U.S. Stock Market Crash|
|Ben S. Bernanke||February 1, 2006 – January 31, 2014||Housing/Credit Boom/Bust|
|Janet L. Yellen||February 1, 2014 – January 31, 2022?||Normalization; EM?|
1. Served as Chairman Pro Tempore from February 3, 1948 to April 15, 1948.
Source: BNY Mellon Center for Global Investment and Market Intelligence and Federal Reserve Bank.
Wars, crashes, recessions, liquidity shortages, inflation, deflation, housing bubbles, and currency misbehavior can occur in any year. But the regularity of these challenges materializing in the first year of a new Fed Chairman's term does not require supernatural theories for explanation. Especially in the post-World War II period, as the role of central banks expanded, the markets seemingly have probed the potential uncertainty of the new monetary policy leadership regimes. In turn, these vague anxieties have nourished the market's tendency to demand higher risk premia when in doubt.
Unfortunately, this "freshman year effect" again may be manifest during Chairman Yellen's inaugural year in 2014. The normalization of U.S. monetary policy already has commenced via tapering. This phase-out of unprecedented monetary stimulus may nurture unpleasant market withdrawal symptoms. And emerging markets have opened 2014 poorly, thanks to a series of political and economic setbacks in several key sovereigns like Argentina and Turkey.
We hope Chairman Yellen will escape the "freshman year effect." But if markets need another excuse for heightened conservatism in 2014 after a terrific 2012 and 2013 for risky assets, the "freshman year effect" fits nicely.
Investors with long horizons should probably ignore this strategic technical anomaly. In virtually every instance, especially since the reign of Chairman Paul Volcker, risky markets generally have behaved well after the new Fed Chairman inspired confidence by showing skill in diffusing their freshman year challenges.
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