WASHINGTON (Reuters) - President Barack Obama is unlikely to tip his hand as soon as financial markets would like on whether he plans to name Federal Reserve Chairman Ben Bernanke to another term.
Many investors have signaled they would prefer Bernanke to get a new four-year term after his first one expires on January 31, 2010 and they would like Obama to lay to rest any uncertainty about the renomination without delay.
But the president is likely to take his time as he weighs whether Bernanke’s role in the runup to the credit crisis will be a political liability going forward and if there is firm evidence the economic recovery is on track.
“If you get beyond August without an announcement, the markets will begin to get nervous,” said Camden Fine, the president of the Independent Community Bankers of America.
Taking history as a guide, a public announcement could be delayed until late October. That is when former President George W. Bush announced his replacement for Alan Greenspan in 2005. Obama is considering putting his own stamp on a Fed that has seen its reputation dented in the wake of the financial meltdown of the past two years.
Financial markets have given Bernanke high marks on the job and rate his chances for reappointment at about 80 percent.
Investors care about who runs the Fed because a new figure, likely a Democrat, might focus on lowering unemployment while tolerating higher-than-desirable inflation.
Such an assumption might lead markets to recalibrate their bets about longer-term securities, sending longer-term interest rates higher.
In addition, while Bernanke has mapped out his exit strategy to pull the economy back from exceptionally low interest rates and extricate the Fed from a flood of loans to financial markets without sparking unwanted inflation, other candidates might chart a different course.
For the president, however, the calculus may be complicated by the economy’s slow path to recovery and a public backlash against financial bailouts for big business at a time when ordinary Americans are suffering rising joblessness and lost personal wealth.
Critics also say Bernanke was part of a Fed that failed to spot a ballooning housing bubble and stood idly by as risky lending proliferated, leading to the credit crisis.
Obama has publicly praised Bernanke’s handling of the crisis, but stopped short of saying he wanted him to stay on.
The president’s advisors will evaluate the merits of extending Bernanke’s term in the light of their own political fortunes, which will be tested in a mid-term election in November 2010 that could be a referendum on Obama’s first two years.
Many lawmakers have been scathing in their criticism of the Federal Reserve. Obama and his advisors will have to decide how much of the attacks are politically opportunistic and how much of the anger reflects broader misgivings about Bernanke and the Fed amid rising joblessness and tumbling home values.
The Senate must confirm the president’s choice for Fed chairman, and while Obama’s Democrats control the legislature, significant opposition to Bernanke could derail his renomination.
Clear evidence the economy is on track for recovery would bolster Bernanke’s candidacy and would justify Obama’s own decision to fight the crisis with aggressive public spending.
“If the economy fell off the cliff, there would of course be a different view,” said Eugene Ludwig, chief executive of Promontory Financial Group.
Bernanke has taken the unprecedented step of arguing his case to the broader public in prime-time television interviews and “town-hall” meetings. He has defended the Fed’s bailouts of banks as a necessary evil while citing his humble upbringing as proof he is in touch with the aspirations and economic challenges of ordinary Americans.
Partisan considerations may affect how the president views Bernanke, who was Bush’s choice to replace Greenspan.
Obama could be the first Democratic president to pick a new Fed chairman since Jimmy Carter tapped Paul Volcker in 1979.
With strong candidates in the wings — White House aide and former Treasury Secretary Lawrence Summers, San Francisco Fed President Janet Yellen, and former Fed vice-chairmen Roger Ferguson and Alan Blinder — Obama may be tempted to claim one of the most important jobs in Washington for his own party.
The president could aim to make history by naming Yellen as the first woman, or Ferguson, as the first African American, to run the central bank.
“It’s also a question of who does Barack Obama want on his team,” said Charles Liegeman, chief investment officer for Advisors Capital Management. “Bernanke was someone he inherited, not someone he chose.”
Reporting by Mark Felsenthal