Federal Reserve
Chairman Ben Bernanke's job rides on protecting the U.S.
economy from the worst of the fallout from housing and
financial market turmoil, but politics and a few missteps could
determine if he wins another term.
Bernanke's four-year term as chairman expires on Jan. 31,
2010. The next president, who will take office in early 2009,
may consider whether to tap someone else to lead the Fed.
While highly regarded as an economist and praised for his
efforts to demystify the U.S. central bank, Bernanke's first
two years in office have been dotted with controversy. Lately,
he has faced a storm of criticism for his handling of a
financial crisis that burst into public view in August.
"They have contributed to the volatility," said Richard
Gilhooly, fixed-income market strategist at BNP Paribas in New
York. "Much of the fear of recession is based on a confusion, a
lack of understanding and a lack of confidence in the policy
that is being administered by the Federal Reserve."
As stocks at home and abroad tumbled in the early weeks of
the new year, the Fed surprised financial markets on Jan. 22
with an interest rate cut of three-quarters of a percentage
point. The cut, which came a week before the Fed's next
scheduled policy meeting, left the benchmark federal funds rate
at 3.5 percent.
The Fed's policy-making Federal Open Market Committee is
expected to lower interest rates by at least another quarter
point at a two-day meeting ending on Wednesday -- just a day
before Bernanke reaches the halfway point in his term as
chairman.
TURNABOUTS
Ultimately, Bernanke's success in guiding the Fed will be
judged on how short and shallow any U.S. downturn is and
whether a recovery is on solid footing by early next year.
But a series of stumbles dating back to the beginning of
his tenure may build a case against his reappointment.
In April 2006, as the Fed was trying to decide how high to
push borrowing costs, Bernanke told Congress the Fed could take
a pause at some point in its rate-hiking campaign, remarks that
led to a rise in inflation expectations.
Days later, CNBC anchorwoman Maria Bartiromo said Bernanke
had told her at a dinner that markets had misconstrued his
words to mean the Fed was done raising rates.
Analysts savaged him for disseminating policy comments
through an informal conversation. Bernanke later called the
episode a "lapse in judgment."
Then, even as problems with subprime mortgages spread this
summer, the Fed said on Aug. 7 that inflation risks topped its
concerns. But three days later, the central bank announced it
stood ready to provide liquidity to cash-starved institutions,
leading to complaints that the Fed was behind the curve.
In December, Fed officials acknowledged worsening financial
conditions but trimmed rates by a slim quarter point. Markets
felt whipsawed when the Fed unexpectedly announced special
auctions designed to thaw frozen credit markets the next day.
Most recently, analysts have questioned whether the Fed
panicked with last week's surprise cut in borrowing costs, the
steepest reduction in more than 23 years.
When France's second-largest bank, Societe Generale
<SOGN.PA>, announced $7 billion in losses due to unauthorized
trades by a single employee the next day, market participants
wondered whether SocGen's efforts to unwind those trades helped
push markets lower and had misled the Fed into cutting rates.
IT'S THE ECONOMY, STUPID
Bernanke, who was named to the Fed by President George W.
Bush after serving as chairman of the president's Council of
Economic Advisers, could face political obstacles if the White
House's next occupant is a Democrat.
Political analysts believe Democrats have an advantage in
November's presidential election because of economic
uncertainties and other factors, but they also say it is an
unpredictable time and anything could happen.
"I think a Democratic president might find someone who's
more in tune with Democratic views," the chairman of the U.S.
House of Representatives Financial Services Committee, Barney
Frank, told Reuters.
Frank, a Massachusetts Democrat, said Bernanke's proposals
to strengthen consumer borrowing protections had not been
strong enough, echoing complaints from other Democratic
lawmakers. The congressman also questioned Bernanke's
effectiveness in blunting the effects of recent financial
volatility.
"He was a little slow in cutting (interest rates). I think
he was a little too concerned with inflation," Frank said.
Historically, presidents have sought to avoid rattling
financial markets by switching Fed chairs put in place by
predecessors. Ronald Reagan stayed the course with Paul
Volcker; Bill Clinton left Alan Greenspan at the helm.
Still, a Democrat might be inclined to pick among highly
regarded economists or businesspeople with ties to the party to
head the central bank.
Candidates could include San Francisco Federal Reserve Bank
President Janet Yellen, who chaired the Council of Economic
Advisers under Clinton, former Treasury Secretary Lawrence
Summers, or former Fed Vice Chair Alan Blinder, analysts say.
(Reuters)
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