Bernanke's 2009 may make 2008 look like cake walk

WASHINGTON (Reuters) - If 2008 was a tough year for Federal Reserve Chairman Ben Bernanke, 2009 is looking no easier as political battles pile on top of tough economic challenges.

With the end of his term looming in January, Bernanke's skill in avoiding pitfalls on both fronts will influence whether he wins another four years at the helm of the Fed.

First, there's the economy: with the U.S. unemployment rate at 9.4 percent and rising, Bernanke faces the challenge of fostering a recovery from an 18-month-old recession with unconventional policies that some worry will ignite inflation.

Then, there's politics: he must convince Congress the Fed deserves a leading role in a restructured financial oversight system even as he addresses criticism of Fed failings before the financial collapse and some actions since.

The political heat was in evidence on Wednesday as a Republican lawmaker charged that the Fed inappropriately threatened to fire Bank of America's chief, Kenneth Lewis, if he balked at going forward with a planned purchase of wounded brokerage Merrill Lynch late last year.

Bernanke is to testify on his behind-the-scenes role in the merger before the House of Representatives Oversight and Government Reform Committee on Thursday. It was the top Republican on the panel, Representative Darrell Issa of California, who accused the Fed of a "cover-up."

It is against these crosscurrents that President Barack Obama will need to decide whether to reappoint Bernanke when his term as chairman expires on January 31. Bernanke's main rival, White House National Economic Council Director Lawrence Summers, who is a former Treasury secretary, will advise Obama on that move.

"He is fighting fires that he does not want to fight, that are way out of his usual domain. I'm sure he'd rather just worry about the fed funds rate," said Torsten Slok, an economist with Deutsche Bank Securities in New York.

PRAISE FROM OBAMA; MARKET CONFIDENCE

At a news conference on Tuesday, Obama praised Bernanke but offered no insight into whether he wants him to serve again. "He has done a fine job under the circumstances," Obama said.

While some politicians may be grumbling, Bernanke -- for now -- has the confidence of economists. In a Reuters poll earlier this month, economists gave him an 8 out of 10 for his handling of the economic crisis. Even so, four out of 39 economists polled said Obama will name Summers as Fed chair.

Now, Bernanke must walk the fine line of keeping borrowing costs low to support a recovery without squandering market confidence that he will keep inflation under control.

After chopping lending rates to near zero percent, Bernanke's Fed embarked on a shopping spree for long-term securities to push down other borrowing costs set in financial markets.

While that strategy pushed rates down at first, longer-term yields on Treasury debt ticked uncomfortably higher for a while as investors grew worried the Fed's massive efforts and a widening U.S. budget deficit would fuel inflation.

At a meeting on Wednesday, the Fed held steady with its program for buying longer-term securities and said high unemployment and idle factories will keep inflation subdued for some time.

"The most important thing he can do is to retain the confidence of financial market participants, and at this point I think for the most part, he has," said James O'Sullivan, an economist with UBS.

FASTER CAR

Bernanke will also try to keep lawmakers from diluting the Fed's powers and chipping away at its independence as they debate a makeover of financial rules and explore measures the central bank took to quell the crisis. The Fed recently hired an experienced lobbyist to help.

Lawmakers fault the Fed for failing to spot the troubling growth in subprime mortgages that sparked the crisis and the extent to which banks were taking undue risks.

Connecticut Senator Christopher Dodd, a Democrat who chairs the Senate Banking Committee, said giving the Fed more authority "is like having a parent giving his son a bigger, faster car, right after he crashed the family station wagon."

However, Bernanke also has quiet support in Congress among members who value his steady hand during the turmoil and his plain-spoken, patient testimony before Congress.

Many lawmakers are privately glad the Fed acted decisively to make money available to struggling financial markets, because lawmakers would have been unable to muster sufficient votes to do so, said a congressional aide, who spoke on condition of anonymity.

(Editing by Leslie Adler)