President Bush has just announced the new Fed Chairman to take over Greenspan's job when he retires early next year. For almost two full decades, Alan Greenspan has held the top post at the Federal Reserve, one of the most, if not the most important central banks in the world.  For a whole generation of traders who sprouted during the tech boom, Greenspan is the only Fed Chairman that they know.  Now, they will have to get to know a new Chairman - Ben Bernanke.

For almost two full decades, Alan Greenspan has held the top post at the Federal Reserve, one of the most, if not the most important central banks in the world.  For a whole generation of traders who sprouted during the tech boom, Greenspan is the only Fed Chairman that they know. Greenspan's decisions impact not only Americans, but also every single person or corporation that is invested in dollar denominated assets.  In the FX market, $1.9 trillion changes hands every day with 89% of all of those transactions involving the US dollar, illustrating the influence that Greenspan has on the global financial markets.  The market has scrutinized and analyzed everything from the size of his briefcase to every word that he uses and doesn't use in his speeches.  Since taking the top job, Greenspan has managed to navigate the US economy through the 1987 stock market crash, the 1991 Gulf War oil spike, the collapse of Long Term Capital Management, the burst of the Nasdaq bubble and 9/11 with only minimal setbacks for the economy.   His ability to get us over these tough hurdles with his characteristically calm and logical demeanor has granted him a semi-divine status amongst both investors * large and small, as well as international political figures.  During his tenure as Chairman, the US economy grew 16 out of 17 years.  There is probably no other person who commands as much respect in the financial markets today as Greenspan.  What this means is that there are big shoes to fill and it remains to be seen how well the new Chairman will able to navigate the economy in the years ahead.

This afternoon, President Bush announced his pick for Greenspan's replacement: Ben Bernanke.

Ben Bernanke

Starting his career with a Ph.D. from MIT and a long time teaching stint in economics and public affairs at Princeton University, Ben Bernanke is probably best known for his term on the Federal Reserve Board of Governors, which he served since August 5, 2002. As a member of the board, he has quickly risen in recognition over the short span of his term as his speeches are now essentially the second most analyzed by Fed watchers after Greenspan. His most well-known stances include an unwavering devotion to inflation-targeting, which Greenspan opposes.  He is also known as "printing-press" Ben, a title that he has been criticized for, because it means that he has explicitly promised to print money as a manner of increasing liquidity to generate inflation, if necessary.  Bernanke has been credited with shaping the policy debate on deflation and helping to spur the decision of lowering interest rates to 45 year lows of 1%.  Other work Bernanke has done indicates his advocacy of combining even more indicators into the models used to determine monetary policy in order to achieve more effective economic stabilization. He has studied this possibility over the years and penned papers describing possible implementation methods. As he prepares to take on the role of President of the CEA, many see this as a preliminary trial position before Bush names him as the top choice to follow Greenspan, who was head of the CEA under President Ford. Of the top 3 original contenders for the position, Bernanke is the last one to come into this role.  Having Bernanke as Fed Chairman would mean that we would probably be moving to an inflation targeting policy similar to the ones followed by the European Central Bank and the Bank of England.  He  may also want to prove early on that he is a staunch inflation fighter. This would be more restrictive and less flexible than the current policy, but having Bernanke as Chairman would also mean bringing about greater disclosure to the public and hopefully the credibility to the Fed.

The Curse of the First Year

Despite how qualified Bernanke may be, he may still be vulnerable to the curse of the first year as Fed Chairman.  With energy prices skyrocketing, inflation increasing and the housing market slowing, consumer spending could face some big risks in the months ahead - this would be a perfect recipe for some challenges tasks on Bernake's plate. Since 1970, every Fed Chairman that assumed the top job has faced a major crisis shortly after entering office.  According to Toni Straka of Prudent Investor, "Arthur F. Burns, chairman from February 1, 1970, climbed the top chair only to oversee the beginning of the 1970's bear market, the closing of the gold window and the first oil shock 1973. When he stepped down on August 6, 1979, his successor Paul A. Volcker had to fight double digit inflation with the highest Fed Funds rates seen ever and managed that the economic downturn through his tightening only became an on-and-off recession from 1979 to 1982 with GDP never declining more than a quarter in a row."  Greenspan himself had to deal with the stock market crash of 1987.

Dollar and Other Market Responses

Finding someone to fill Greenspan's shoes who actually held some respect in the international financial markets was surely a daunting task, but the same was said when the government was looking for someone to fill Greenspan's predecessor Paul A. Volcker's shoes.  On the day that Greenspan was announced as the replacement for Volcker, the trade-weighted dollar index fell 1.7 percent, the S&P 500 index slid 0.5% while Treasury yields increased 25 to 35 basis points. Today, we also saw a slide in the dollar initially. The effect did not last long though, as Greenspan managed to maintain the reputation of the Federal Reserve throughout his tenure.  Given his experience in the Federal Reserve working with Greenspan, the same could be said about Bernanke.  However, only time wil tell - in the meantime, we breathe a sigh of relief that this pick was surely the safest one.

Kathy Lien is the Chief Currency Strategist at FXCM.