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The "Freshman Year Effect" for New Fed Chairmen

February 2014

Jack Malvey, CFA

Chief Global Markets Strategist


Bryan Besecker

Investment Analyst

It's uncanny.

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

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.
2. Served as Chairman Pro Tempore from February 1, 1978 to March 7, 1978.
3. Served as Chairman Pro Tempore from March 3, 1996 to June 20, 1996.

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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