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Tapering Is Nothing Compared to the Fed’s Real Challenge, Says Funk

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In the eight years that Ben Bernanke has run the Federal Reserve, investors have had to acquaint themselves with all sorts of new jargon and monetary tactics.

From TARP to ZIRP to QE one, two and three, the unprecedented alphabet soup of solutions that Bernanke has deployed to stabilize markets and kindle economic recovery have been called risky, miraculous, ineffective, experimental and more.

But according to at least one former Fed member, the hardest part is still to come.

"I believe the Federal Reserve has a real challenge on their hands," says Bob Funk, CEO of Express Employment and the former chairman of the Federal Reserve Bank of Kansas City. "They are in a box that is going to be difficult to unwind and get out of, in my estimation."

Clearly the timing and execution of the so-called tapering process is wrought with risk, as evidenced by the aftermath of the FOMC meeting earlier this month. In fact, in a speech in Frankfurt, Germany this week, Fed Governor Jeremy Stein acknowledged that the Fed had confused markets and suggested that perhaps a link should be created between improvement in the unemployment rate and the size of future taperings. Stein's objective is to make the process as transparent and "mechanical as possible."

Of course, the wind-down of QE3 is only one part of the extraordinary measures currently in place, and Funk says when the time comes to actually increase, or normalize, interest rates, it is going to be much harder.

"It is a large challenge," he says. "I think it is going to be a long-term process to get [rates] back to what we used to call neutral, which is 3.5% to 4.5%." Given that the biggest borrower on the planet — the U.S. — arguably also has the world's biggest exposure to interest rate risk, Funk says that "to raise [rates] is not only going to be a challenge for private industry, it's also a challenge for the government itself."

Funk is quick to point out that he has been "off the Fed" since 2007, but as the head of a $2.5 billion staffing firm that has over 6,000 employees, he is still very much in the game, economically speaking.

As far as two other key issues concerning the Fed (Bernanke's successor and his legacy), Funk says he thinks vice chairman and current front-runner Janet Yellen will be appointed and will receive the full support and strength of the Fed, as she undoubtedly will have to contend with challenges of her own.

As for the history books and how they'll characterize the Bernanke years, Funk predicts Bernanke's chapter "won't be written for some time to come," noting that Alan Greenspan's legacy is still being deliberated and he's been gone for eight years.

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